Re Introductions, Ltd.
Introductions, Ltd. v. National Provincial Bank Ltd.  1 All E.R. 887
Cotman v. Brougham [(1918) AC 514]
Cotman v. Brougham
Re David Payne & Co. Ltd., Young v. David Payne Co., Ltd. [(1904) 2 Ch. 608]
BUCKLEY, J.’s judgment [(1904) 2 Ch. at p. 612]
HARMAN, L.J. – This is an appeal from BUCKLEY, J.’s decision, on a summons in the liquidation of this company raising the question whether the debentures held by the defendant bank are valid against the liquidator or are void as being tainted by the doctrine of ultra vires. The judge decided two questions. First, whether the activity in question was within the powers of the company: that he answered in the negative, and there is no appeal from that. The second question, which is the subject of the appeal, was whether in borrowing the money in question the company was acting within its powers and could give the bank a valid security.
This company started its career in 1951 in connection with the Festival of Britain and facilities to be afforded to visitors from abroad in connection with that event. It had an issued capital of £400. Subsequently for some years after 1953 it carried on a business connected with deck chairs at a seaside resort. From 1958 to 1960 it carried on no business but in the latter year there was a transfer of shares and a new board was elected which decided to make use of the company for a venture connected with pigs. It has always been the ambition apparently of the commercial community to stretch the objects clause, thus getting the advantage of limited liability with as little fetter on the activities of the company as possible. As LORD D AVEY said, the little man starting a grocery business usually combined groceries with power to bridge the mighty Zambesi; but still one cannot have an object to do every mortal thing one wants, because that is to have no object at all. There was one thing that this company could not do and that was to breed pigs. The venture of pig-breeding is the type of adventure which has always drawn money from the pockets of the British public, who apparently much prefer to regard themselves as owners of an apple or an apple tree or a pig rather than a mere share in a company. Anyhow this venture, like other similar ventures, has been a disastrous failure, and the company was ordered to be wound up in 1965.
In 1960 the then new directors approached the defendant bank with a view to opening an account. This account became in due course of time heavily overdrawn, and the defendant bank, requiring security, were offered two debentures secured on the company’s assets. It is common ground that before the security was given the defendant bank was furnished with a copy of the memorandum and articles of association and also became aware, and expressly aware, that the company was carrying on as its sole business the business of pig- breeding, which it has now acknowledged was ultra vires its memorandum. The bank has however relied on the fact that there is in the memorandum a sub-cl. (N) [(Sub-clause (N) was in these terms: “To borrow or raise money in such manner as the company shall think fit and in particular by the issue of debentures or debenture stock perpetual or otherwise and to secure the repayment of any money borrowed or raised by mortgage charge or lien upon the undertaking and the whole or any part of the company’s property or assets whether present or future including its uncalled capital and also by a similar mortgage charge or lien to secure and guarantee the performance by the company of any obligation or liability it may undertake] empowering the company in general terms to borrow, in particular by the issue of debentures, and to secure the loan by charge. There is also in this memorandum a form of words which is common enough and has been for many years; and the words are these:
“It is hereby expressly declared that each of the preceding sub-clauses shall be construed independently of and shall be in no way limited by reference to any other sub-clause and that the objects set out in each sub-clause are independent objects of the company.”
Of course the original idea of that form of words was to avoid the old difficulty, which was that there was a main objects clause and all the others were ancillary to the main objects; and many questions of ultra vires arose out of that.
It was argued that the only obligation of the defendant bank was to satisfy itself that there was an express power to borrow money and that this power was converted into an object by the concluding words which I have read. It was said that if this was so not only need the defendant bank enquire no further but they were unaffected by knowledge that they had that the activity on which the money was to be spent was one beyond the company’s powers.
The judge rejected this view, and I agree with him. He based his judgment, I think, on the view that a power or an object conferred on a company to borrow cannot mean something in the air: borrowing is not an end in itself and must be for some purpose of the company; and as this borrowing was for an ultra vires purpose that is an end of the matter.
Counsel for the defendant bank I think agreed that if sub-cl. (N) must in truth be construed as a power, such a power must be for a purpose within the company’s memorandum. He says that it is “elevated into an object” (to use his own phrase) by the concluding words of the memorandum and this object, being an independent object of the company, will protect the lender and that that is its purpose. I answer that by saying that you cannot convert a power into an object merely by saying so. Sub-clause (N) cannot in truth stand by itself any more than certain other of the clauses of this memorandum, for instance sub-cl. (D), which states
“To carry on any other trade or business… which can in the opinion of the board…be advantageously carried on… in connection with or as ancillary to any of the above businesses…”
Then there is sub-cl. (I), which is, to promote any other company for the purpose of acquiring any property or rights or converting any of the liabilities of this company or of its undertaking. And there are other similar sub-clauses which are clearly ancillary powers although under the concluding words they are stated to be independent objects.
Counsel for the defendant bank relied on the well-known case, Cotman v. Brougham [(1918) AC 514] and, in particular, the speech of Lord Parker of Waddington, where one finds this passage:
“A person who deals with a company is entitled to assume that a company can do everything which it is expressly authorised to do by its memorandum of association, and need not investigate the equities between the company and its shareholders.”
I would agree that if the defendant bank did not know what the purpose of the borrowing was it need not enquire, but it did know, and I can find nothing in Cotman v. Brougham to protect it notwithstanding that knowledge.
An earlier case, Re David Payne & Co. Ltd., Young v. David Payne Co., Ltd. [(1904) 2 Ch. 608] shows the limit to which this particular doctrine can go. The first words of the headnote are as follows:
“Where a company has a general power to borrow money for the purpose of its business, a lender is not bound to enquire into the purpose for which the money is intended to be applied, and the misapplication of the money by the company does not avoid the loan in the absence of knowledge on the part of the lender that the money was intended to be misapplied.”
I do not think I need read the passage of BUCKLEY, J.’s judgment [(1904) 2 Ch. at p. 612] in the case on which I rely.
I agree with the judge [(1968) 2 All E.R. at p. 1227] that it is a necessarily implied addition to a power to borrow, whether express or implied, that one should add “for the purposes of the …. company.” This borrowing was not for a legitimate purpose of the company; the bank knew it and therefore cannot rely on its debenture. I would dismiss the appeal.
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