In re Jon Beauforte (London) Ltd. [1953] 1 Ch. 131Cases referred
Great North-West Central Railway Co. v. Charlebois [(1899) A.C. 114],
York Corporation v. Henry Leetham & Sons Ld., [(1924) 1 Ch. 557, 573
Judgement
A company was authorized by its memorandum of association to carry on the business of costumiers, gown makers, and other activities ejusdem generis. The company decided to undertake the business of making veneered panels, which was admittedly ultra vires, and for this purpose erected a factory at Briston. The company later went into compulsory liquidation. A number of proofs of debt were lodged, which were rejected by the liquidator on the ground that the contracts to which they related were ultra vires . Applications by way of appeal were lodged, as indicated below, by three creditors, none of whom had actual knowledge that the veneer business was ultra vires:
1. A firm of builders who constructed the factory had brought an action claiming £2,078 as owing; the company put in a defence that the work had been unlicensed. Later, the company consented to judgment for £2,000 payable in four instalments, the whole of the original debt or the balance thereof remaining due to be payable in the event of default. Default having been made on the first instalment, the creditors signed final judgment for £2,078;
2. A firm supplied veneers to the company valued at £1,011; being unpaid, they issued a specially indorsed writ and recovered judgment summarily in default of defence;
3. A firm sought to prove for a simple contract debt of £107 in respect of coke supplied to the factory; they contended that the fuel might have been used for legitimate purposes. They had received letters from the company on paper headed “Veneered Panel Manufacturers”: –
Held, dismissing the applications, (1) that no judgment founded on an ultra vires contract could be sustained unless it embodied a decision of the court on the issue of ultra vires, or a compromise of that issue; Great North-West Central Railway Co. v. Charlebois [(1899) A.C. 114], considered and explained; (2) that the suppliers of the coke were fixed with clear notice of the purposes of the factory; but (3) that the rejection of the applicants’ proofs was without prejudice to any rights which they might have (a) of tracing any of their money or property, or (b) of participating in the distribution of surplus assets, after provision had been made for the claims of proving creditors, costs and expenses.
Applications on appeal from rejection of proofs by liquidator.
The company, Jon Beauforte (London) Ld., was in compulsory liquidation. According to the memorandum of association the objects of the company were:
“(a) To carry on the business of costumiers, gown, robe, dress and mantle makers, tailors, silk mercers, makers and suppliers of clothing, lingerie, and trimmings of every kind, corset makers, furriers, general drapers, haberdashers, milliners, hosiers, glovers, lace makers and dealers, feather dressers and merchants, utters, boot and shoe makers, dealers in fabrics and materials of all kinds, ribbons, fans, perfumes and flowers (artificial and natural);
(b) To carry on any other trade or business whatsoever which can, in the opinion of the board of directors, be advantageously carried on by the company in connexion with or as ancillary to any of the above businesses or the general business of the company; and
(c) To do all such other things as are incidental or conducive to the above objects or any of them.”
Towards the end of 1949 the company decided to undertake the business of manufacturing veneered panels, which was admittedly ultra vires, and accordingly entered into an oral contract with Grainger Smith & Co. (Builders) Ld. (admittedly ultra vires) for the construction of a factory on the Bedminster Trading Estate near Bristol on a “cost plus” basis, which amounted to £2,078 9s. 3d. On September 20, 1950, the builders sued the company for that amount. The action was transferred to an official referee, and leave to defend was given. The defence was that the work was not licensed. On May 30, 1951, an order was made by consent that all proceedings be stayed and that the company should pay £2,000 in four instalments and that, if the company made default, the builders might sign judgment for the sum of £2,078 9s. 3d., or for the balance thereof then remaining due. The company made default on the first instalment, and on August 9,1951, the builders signed judgment for £ 2,078 9s. 3d. The earlier consent judgment was in the nature of a compromise, but was arrived at on the footing that the contract was intra vires. The builders lodged a proof for £2,078 9s. 3d., which the liquidator rejected.
John Wright & Sons (Veneers) Ld. supplied the company with veneers, and sued for the price, namely, £1,011 2s. 10d. The company did not defend the action or raise the issue of ultra vires, and the suppliers obtained leave to sign judgment under Order 14, r. 1, for that sum and costs. The purchase of the veneers was admittedly ultra vires. The liquidator rejected the supplier’s proof.
On May 17, 1950, the company on paper headed “Veneered Panel Manufacturers; Plywood panels veneered in all woods for interior decoration and furniture, wood block, strip and parquet flooring”, entered into correspondence with Lowell Baldwin Ld. which led to a supply of coke. The liquidator rejected a proof for the unpaid price.
It was conceded that the applicants had constructive knowledge of the company’s memorandum, and that they had no actual knowledge that their contracts were ultra vires the company.
ROXBURGH, J. – I have before me three appeals against these rejections. As regards the last, the argument is that the company needed fuel for its legitimate business, and that the fuel merchant cannot be prejudiced by its misapplication. I need not consider what the position might have been if the fuel merchant had not had clear notice that the business, which the company was carrying on and for which the fuel was required, was that of veneered panel manufacturers. The correspondence shows that they had notice of that, and as they had constructive notice of the contents of the memorandum of association, they had notice that the transaction was ultra vires the company. Their proof was rightly rejected, although they and the other two claimants may have other rights arising out of these ultra vires transactions. The other two cases depend upon whether the claimants can pray their judgments in aid; for the transactions out of which they arose are admittedly ultra vires.
There seems to be but one authority upon the efficacy of a judgment obtained upon an ultra vires contract. It is the decision of the Privy Council in Great North-West Central Railway Co. v. Charlebois [(1889) AC 114]. On September 9, 1891, the company sued Charlebois for breach of an ultra vires contract, and two days afterwards Charlebois sued the company to recover the balance due and for a lien. The question of ultra vires was not raised. By consent there was judgment against the company for a large sum and a declaration of lien. The Chancellor of Ontario had said in the court of first instance: “It follows that, if the act is beyond the power of the company to do or ratify, no judgment obtained by the consent of the company treating it as authorized can remove its invalidity, for the virtue of such judgment rests merely on the agreement of the parties, and the incapacity to do the act involves the incapacity to consent that it be treated as valid.” The majority of the Supreme Court took a different view. King J., delivering that judgment said: “But now we come to a wholly different question. Charlebois is not suing upon the contract. That has become merged in the judgment rendered upon it, and the present proceedings are to set aside that judgment or to restrain its enforcement. The learned chancellor was of opinion that the judgment has no greater validity than the contract, because it was determined by consent, and the company could not validly give a consent to treat as valid what was ultra vires.
But their Lordships of the Privy Council disagreed with them, saying:
“But the difficulty is to reconcile an opinion that the contract is ultra vires with an opinion that a judgment obtained as this was is a binding judgment. The authorities referred to by the Supreme Court do not relate to contracts ultra vires. It is quite clear that a company cannot do what is beyond its legal powers by simply going into courts and consenting to a decree which orders that the thing shall be done. If the legality of the act is one of the points substantially in dispute, that may be fair subject of compromise in court like any other disputed matter. But in this case both the parties, plaintiff or defendant in the original action and in the cross-action, were equally insisting on the contract. The president, who appears to have been exercising the powers of the company, had an interest to maintain it, and took a large benefit under the judgment. And as the contract on the face of it is quite regular, and its infirmity depends on extraneous facts which nobody disclosed; there was no reason whatever why the court should not decree that which the parties asked it to decree. Such a judgment cannot be of more validity than the invalid contract on which it was founded.”
Now the first difficulty is to decide whether the Privy Council adopted the reasoning of the chancellor with only one reservation (namely, that where ultra vires or intra vires is a point substantially in dispute, that point may be validly compromised) or whether the Board declined to decide the issue between the chancellor and the Supreme Court in the general terms in which it was raised and confined themselves to holding that where both parties are equally insisting on the contract in the circumstances which existed in that case, a consent order cannot be valid.
I think that the first alternative is to be preferred. “It is quite clear”, they said, “that a company cannot do what is beyond its legal powers by simply going into court and consenting.” That proposition seems to me to negative the basis of the judgment of the Supreme Court that a consent judgment raises an estoppel and to involve the adoption of the reasoning of the chancellor, with the one reservation to which I have referred. If that be so, the next question is to draw the line which bounds the principle and the reservation. It seems to me that any compromise made upon the footing that the contract is intra vires, and any judgment suffered in an action in which the defence of ultra vires is not raised, can be set aside because (applying the principle stated) it is ultra vires the company to proceed upon the footing that the contract is intra vires, whether by negotiating a compromise on that footing or by submitting to judgment without delivering an appropriate defence. Accordingly, I interpret the judgment of the Privy Council as meaning that in the case of an ultra vires contract no judgment founded upon it is inviolable, unless it embodies a decision of a court upon the issue of ultra vires or a compromise of that issue and I adopt the reasoning which appears to lead to that conclusion. This decision was cited to Rusell J. in York Corporation v. Henry Leetham & Sons Ld., [(1924) 1 Ch. 557, 573 where he said: “An ultra vires agreement cannot become intra vires by reason of estoppel, lapse of time, ratification, acquiescence, or delay.” Accordingly, the proofs of the builder and the suppliers were rightly rejected.
In view of this conclusion, I need not further explore the arguments which I heard upon the question whether these judgments could be reopened in accordance with the principles applied in bankruptcy and liquidation to judgments generally. But the rejection of the proofs must be accompanied by a reservation of tracing rights which may arise, for the formulation of which I invite the assistance of counsel.
[It was agreed that the following terms should be included in the order:
“This order is without prejudice to the questions whether the applicants are entitled to trace any money or other property of the applicants are entitled to trace any money or other property of the applicants into any particular asset or the proceeds of sale thereof and to participate in the distribution of any assets remaining in the hands of the respondent liquidator after satisfaction of or provision for the claims of creditors in respect of debts provable in the winding up and all proper costs, charges and expenses in the liquidation.”
It was further agreed that, as the three applicants had been selected to represent other creditors in a quasi-representative capacity, they should be entitled to their costs as between party and party]. Applications dismissed.
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