[PDF copy of this judgment can be sent to your email for N300 only. Just order through email@example.com and firstname.lastname@example.org or text 07067102097]
KANSSEN AND OTHERS
HOUSE OF LORDS
11, 12, 13, 14, 18, 20, 21 FEBRUARY, 22 MARCH 1946
 A.C. 459
BEFORE THEIR LORDSHIPS:
LORD SIMONDS AND
Harold Christie KC and Hector Hillaby for the appellant.
Raymond Jennings KC and Michael Albery for the respondent
Billinghurst, Wood & Pope (for the appellant);
Ashurst, Morris, Crisp & Co (for the respondent Kanssen);
Paisner & Co (for the respondents other than Kanssen).
C St J Nicholson Esq Barrister.
COMPANY LAW:– Directors – Failure to appoint – Allotment of shares by persons purporting to be directors – Distinction between defective appointment and no appointment – Rule in Turquand’s case – Companies Act, 1929 (c 23), s 143, Sched I, Table A, art 88.
COMPANY LAW:– Director or acting director who claims to hold the company to a transaction which the company had not, though it might have, authorized – Relevant considerations – Statute – Quis custodiet ipsos custodies- Duty of directors and those who purport to act as directors, to look after the affairs of the company, to see that it acts within its powers and that its transactions are regular and orderly as prescribed by law
COMMERCIAL LAW – AGENCY:- Maxims – omnia praesumuntur rite esse acta – Doctrine of ostensible authority – Limits – Whether an ostensible agent cannot bind his principal to that which the principal cannot lawfully do
SUMMARY OF FACTS AND JUDGMENT
A certain company was incorporated in 1939 with a nominal capital of £100 in £1 shares. The articles of the company incorporated certain articles of Table A, including art 88, which validated the acts of persons acting as directors though it was afterwards discovered that there was a defect in their appointment or qualification (the provisions of the article being similar in material respects, for the purpose of the case in question, to those of the Companies Act, 1929, s 143). K and C were the first directors of the company and each held one share, these being the only shares allotted. Disputes arose between K and C and C entered into a scheme with S to remove K from his directorship. With this object, C and S falsely claimed that in February 1940, S had been appointed a director and they fabricated an entry in the minute book to this effect. In April 1940, C and S ineffectively attempted to deprive K of his directorship, and they purported to issue one share to S. No general meeting of the company was held in 1941, as required by its articles, and therefore, from 1 January 1942, there were no directors of the company. On 30 March 1942, C and S purporting to act as directors, appointed M a director of the company and thereupon C, S and M allotted 34 shares to M, 32 to S and 24 to C. As the result of an action brought by K for (inter alia) rectification of the register by the removal of the names of all persons as the holders of shares except himself and C as holders of one share each, an order was made that the register should be rectified accordingly. On appeal, it was contended by M (i) that the issue of shares to him had been validated by the Companies Act, 1929, s 143, and Table A, art 88;(ii) that, by virtue of the rule in Turquand’s case, he was entitled to treat the shares as validly allotted:—
Held –(i) Sect 143 of the 1929 Act and Table A, art 88, did not validate the transactions of 30 March 1942 (viz the allotment of shares to M and his appointment as a director) because, on the facts of the case, neither C nor S were directors at the time; C’s appointment had terminated at the end of 1941, and S had never been appointed. Sect 143 and Table A, art 88, applied only to acts done by persons acting as directors whose appointment or qualification was afterwards found to be defective. They did not cover a case where there had been a total absence of appointment or a fraudulent usurpation of authority.
Tyne Mutual Steamship Insurance Assocn v Brown applied.
(ii) M was not entitled to invoke the rule in Turquand’s case because he himself was purporting to act on behalf of the company in the unauthorised transaction.
Decision of the Court of Appeal, sub nom Kanssen v Rialto (West End) Ltd ( 1 All ER 751) affirmed on other grounds.
The decision in the House of Lords is based upon a different ground from that in the courts below. By virtue of art 73 of Table A, as modified by the company’s articles there were at the relevant date no directors in existence. Art 88 of Table A is therefore irrelevant, since it applies where there is a defective appointment but not where there is no appointment at all. The argument based on the application of Turquand’s case, which was fully developed for the first time by the indulgence of the House of Lords, fails since there is apparently no authority which holds that a director can invoke the rule to validate an irregular transaction to which he is himself a party. The question of the sufficiency of the inquiries made in order to satisfy this rule, upon which the trial judge and the Court of Appeal disagreed, does not, therefore, arise.
As to Defect in Appointment of Directors, see Halsbury, Hailsham Edn, Vol 5, pp 298, 299, para 511; and for Cases, see Digest, Vol 9, pp 440–442, Nos 2855–2868.
As to Contracts of Companies, see Halsbury, Hailsham Edn, Vol 5, pp 423–425, paras 698, 699; and for Cases, see Digest, Vol 9, pp 628–630, Nos 4160–4175.
Cases referred to in opinions
Royal British Bank v Turquand (1856), 6 E & B 327, 9 Digest 615, 4094, 25 LJQB 317.
Tyne Mutual Steamship Insurance Assocn v Brown (1896), 74 LT 283, 9 Digest 323, 2046.
Dawson v African Consolidated Land & Trading Co  1 Ch 6, 9 Digest 433, 2823, 67 LJCh 47, 77 LT 392.
British Asbestos Co Ltd v Boyd  2 Ch 439, 9 Digest 442, 2865, 73 LJCh 31, 88 LT 763.
Channel Collieries Trust Ltd v Dover, St Margaret’s & Martin Mill Light Ry Co  2 Ch 506, 10 Digest 1147, 8118, 84 LJCh 28, 111 LT 1051.
Appeal by the respondent Morris from a decision of the Court of Appeal, dated 26 May 1944, and reported, sub nom Kanssen v Rialto (West End) Ltd ( 1 All ER 751). The facts are fully set out in the opinion of Lord Simonds.
Harold Christie KC and Hector Hillaby for the appellant.
Raymond Jennings KC and Michael Albery for the respondent Walker, trustee in bankruptcy of the respondent Kanssen.
C R D Richmount for the respondent Rialto (West End) Ltd.
The respondent Kanssen did not appear.
Their Lordships took time for consideration
22 March 1946. The following opinions were delivered.
My Lords, the opinion which Lord Simonds has prepared in this appeal, and which he is about to deliver, covers the whole ground and I need say no more than that I concur in every respect with his conclusions. I move that the appeal be dismissed.
My Lords, I also have had an opportunity of considering the opinion about to be delivered by my noble and learned friend, Lord Simonds, and I concur in it.
My Lords, I have had the like opportunity and likewise concur.
My Lords, this appeal occupied many days in this House, but the facts relevant to the issues which your Lordships think it necessary to determine can be stated at no great length. In two consolidated actions, in which this appeal is brought, the respondent Kanssen, a Dutchman, the plaintiff in both actions, in which the respondent company, Rialto (West End), Ltd and the appellant Morris and two other persons, Robert Cromie and Eric Paul Strelitz, were defendants, sought to have it determined who were the directors and who were the shareholders and what shares they held of the respondent company.
The company (as I will call the respondent company) was incorporated on 27 December 1939, with the primary purpose of taking up a lease of the Rialto Cinematograph Theatre in Coventry Street, London. Its nominal capital was £100 in £1 shares. Upon its incorporation two shares were allotted to the subscribers to the memorandum of association, and they transferred them, the one to Cromie, the other to Kanssen. There is no question as to the validity of the issue and transfer of these two shares. At the same time the same subscribers to the memorandum, in exercise of the authority conferred on them by the articles of association of the company, appointed Cromie and Kanssen to be the first directors of the company. This was a regular and valid appointment. The company in due course embarked on the business for which it was incorporated. It entered into possession of the Rialto Theatre and acquired a lease of it. Soon disputes arose between Cromie and Kanssen, into the merits of which I need not enter. Cromie made an alliance with Strelitz and together they concocted a scheme for getting rid of Kanssen. It was an essential part of this scheme that Strelitz should be appointed a director, so that Cromie and he could, under art 8(7) of the company’s articles, call upon Kanssen to resign. They claimed, but falsely claimed, that at a meeting of directors held on 1 February 1940, at which Cromie and Kanssen were present, Strelitz was duly appointed a director, and they concocted a minute to this effect, which was entered in th company’s minute book and in due course signed by Cromie. Strelitz assumed to act as director, and on 9 April 1940, Cromie and he, in purported exercise of their power under the articles, requested Kanssen to resign his office of director. The request was a nullity and Kanssen remained a director.
On 12 April 1940, Cromie and Strelitz purported to hold a meeting of directors, and thereat issued one share to Strelitz and seven more shares to Cromie. The issue was invalid and of no effect. On 26 April 1940, an extraordinary general meeting of the company was held. Cromie was there; so were Kanssen and Strelitz, but the latter had no right to be there. At that meeting Cromie moved, and Strelitz seconded, a resolution to confirm the appointment of Strelitz as a director. It appears to have been carried by the votes of Cromie and Strelitz against the opposition of Kanssen. There was no appointment to confirm. Strelitz had no right to second a resolution or to vote for it: Cromie could lawfully use one vote only. No resolution was effectively passed and no valid appointment emerged from these proceedings. Kanssen withdrew protesting and continued to protest. Nevertheless from that time onward, throughout 1940 and 1941, Strelitz acted as a director with Cromie. There was in fact little to be done, as the cinema was closed as the result of enemy action. No general meeting of the company was held in 1941. It is not disputed, therefore, that at the end of 1941 both Cromie and Strelitz (if he were a director) ceased to be directors under art 73 of Table A as varied by art 22 of the company’s articles. From 1 January 1942, there were no directors of the company.
Early in 1942 it appeared that the cinema might be able to reopen. Further finance was needed, and for that purpose Cromie got into touch with Morris and made an arrangement with him under which (inter alia) he was to become a director of the company and certain shares were to be allotted to him. In pursuance of this arrangement, on 30 March 1942, Cromie and Strelitz held a meeting of directors, at which first Morris was appointed a director, then, Morris having joined the board, they three allotted 34 shares to Morris, 32 shares to Strelitz and 24 shares to Cromie. I will, later in this opinion, discuss this meeting in greater detail. On or about 20 April 1942, Strelitz transferred 17 of his shares to Morris. If all the shares were validly issued, the position then was that Kanssen held one share, Morris 51 shares, Cromie 32 shares and Strelitz 16 shares. In the meantime, on 30 March 1942, and 13 April 1942, Kanssen issued his writs in the two actions, which were afterwards consolidated. It is sufficient for the present purpose to say that in effect he claimed that the only shares validly issued were the two shares issued to the subscribers and by them transferred to Cromie and to him, and that the register of the company should be rectified by altering Cromie’s holding to one share and removing the names of all other persons except himself therefrom. He also claimed a declaration that he and Cromie were the only directors of the company and that Strelitz and Morris were not directors.
I will dispose at once, and in a few words, of the question of directorship. Though it appears not to have been realised until then, it was in the course of the trial appreciated what was the effect of art 73 of Table A, as varied by the company’s art 22, and it was admitted then and at the bar of the House that neither Cromie nor Strelitz has, in any view, been a director since the end of 1941. The same consideration applies to Kanssen. Whether or not he ceased to be a director at an earlier date, at any rate he did so at the end of 1941. Morris rests his claim upon his appointment by Cromie and Strelitz at the meeting of 30 March 1942. But, apart from the considerations which apply equally to the allotment of shares and to this appointment, it is, I think, clear that neither the Companies Act, 1929, s 143, and Table A, art 88 (which I shall have to consider), nor the general law can avail to establish him in his office of director when he was not in fact appointed a director. To Cohen J and to the Court of Appeal, this seemed too plain for argument.
I turn then to the more difficult question of the shares. From the short narrative that I have given, it is clear that no shares were in fact validly issued except the one share each held by Cromie and Kanssen. Cohen J accordingly, having decided the long and hotly contested question of fact in favour of Kanssen, ordered the register to be rectified by striking out the name of Cromie as the holder of any but one share and the name of Strelitz altogether. It remained to consider the case of Morris. Morris, faced with the fact that the shares were not validly issued, relied on defences arguable by him but not open to Cromie or Strelitz. He claimed the benefit of the Companies Act, 1929, s 143, and of art 88 of Table A. He further claimed under the general law that, even if the shares were not validly issued, yet he was entitled to treat them as validly issued, a claim that must have been faintly pursued in the courts below, since it finds no mention in any judgment. He further claimed that Kanssen was debarred by his laches from alleging the invalidity of the issue of shares. This last claim has no justification. I observe that neither Cohen J nor the Court of Appeal, deal with it, presumably because to them, as to me, it appeared upon the facts to be incapable of serious argument.
At the hearing before Cohen J and in the Court of Appeal, the major argument was upon the section and article to which I have referred, the defence upon which Morris relied being met by the plea that, in the circumstances of the case, neither section nor article was relevant and, even if they were, they would not avail him since he was put upon his inquiry and might, if he had made proper inquiries, have discovered the truth. Several questions of difficulty seem to be here involved: (i) whether either section or article has any application to the present case;(ii) what amounts to discovery of a defect for the purpose of either section or article, and whether any party is debarred from its benefit unless and until he has himself discovered the defect;(iii)(an elaboration perhaps of the second question) whether, if a party is put upon his inquiry and he might, if he made inquiry, discover the defect, he can still say that he has not discovered it;(iv) in the circumstances of the present case whether Morris was in fact put upon his inquiry and, being so put, made the proper inquiry. It seems that in both courts below it was on the first question assumed (not indeed by counsel for Kanssen but in the judgments of the court) that the section and article were relevant. In both courts, too, on the second question it was decided that Morris could rely on them, unless he discovered the defect; it was immaterial that Cromie and Strelitz were at all times well aware of it. On the third question both courts decided that Morris was put on his inquiry, holding that, if he relied on the section or article, he must be subject to the same obligation as if he was relying on the general law as stated in Turquand’s case, to which I refer later. It was upon the fourth question that the courts diverged, Cohen J holding that, being put upon his inquiry, he made the inquiries that the circumstances demanded, the Court of Appeal holding that he had not made such inquiries and therefore could not be allowed to say that he had not discovered this defect. I have ventured to state in this compendious form judgments which covered a wide field. I have done so because the conclusion to which I understand that your Lordships have unanimously come upon the first question makes it unnecessary to consider the other questions. They arise only if the circumstances of the present case bring it within the scope of section or article.
Before I consider this first question I may dispose of two other matters. First, I agree with the Court of Appeal that in any view of the case Morris cannot maintain that the 17 shares allotted to Strelitz and by him transferred to Morris were validly allotted. Strelitz at all times knew of the defect and Morris could get no better title. Secondly, I observe that Lord Greene MR dismissed Morris’s plea on the additional ground that either Cromie was a principal as between himself and the company (in which case Morris was merely a nominee between whom and the company there was no privity) or that he was acting as agent for Morris in applying for the shares allotted to him. I do not think that the first alternative is on the facts a tenable view. But Lord Greene MR went on to say that, if the latter view was right, the knowledge of the defect which the agent had must be imputed to the principal, Morris thus being affected with Cromie’s knowledge. My Lords, I would not be taken as assenting to this view which appears to ignore both the capacity in which Cromie acquired the relevant knowledge and the fact that Cromie was acting fraudulently as well towards Morris as to other parties.
The first question, to which I return, is whether (a) the Companies Act, 1929, s 143, or (b) art 88 of Table A (which was adopted by the company) has any relevance to the circumstances of the present case. The Companies Act, 1929, s 143, which is in the same terms as corresponding sections in previous Acts, provides:
‘The acts of a director or manager shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification.’
Art 88 of Table A, which does not materially differ from similar articles in earlier Tables, provides:
‘All acts done by any meeting of the directors or of a committee of directors, or by any person acting as a director, shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such director or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a director.’
The section can be invoked only where there is a defect afterwards discovered in the appointment or qualification of a director; in the article, the condition is that it is afterwards discovered that there was come defect in the appointment of a director or person acting as a director, or that he was disqualified to act as a director. Though the language of the section differs in some respects from that of the article, it does not appear that the difference is material for the purpose of the present case.
The facts relevant to the question now under consideration have already been stated. I will very briefly tabulate them: (i) On 1 February 1940, Cromie and Kanssen the only directors and the only shareholders holding one share each. (ii) On or about that date, the fraudulent assumption of office by Strelitz and a minute concocted to record an appointment which did not take place. (iii) On 9 April 1940, an ineffective attempt to expel Kanssen from his office. (iv) On 12 April 1940, the ineffective allotment of one share to Strelitz and seven shares to Cromie at a purported meeting of directors. (v) On 26 April 1940, an extraordinary general meeting of the company at which, as I have pointed out, nothing was effectively done. (vi) At the end of 1941, the determination of the term of office of Cromie and Kanssen and of Strelitz, if he was a director, and from that date no directors of the company. It is in these circumstances that the question arises whether the section or article can be called in aid by Morris in order to validate the transactions of 30 March 1942, viz, the allotment to him of shares and the appointment of him as a director. Do the facts that I have stated establish a defect in the appointment or qualification of Cromie or Strelitz?
There is, as it appears to me, a vital distinction between (a) an appointment in which there is a defect or, on other words, a defective appointment, and (b) no appointment at all. In the first case, it is implied that some act is done which purports to be an appointment but is by reason of some defect inadequate for the purpose: in the second case, there is not a defect; there is no act at all. The section does not say that the acts of a person acting as director shall be valid notwithstanding that it is afterwards discovered that he was not appointed a director. Even if it did, it might well be contended that at least a purported appointment was postulated. But it does not do so, and it would, I think, be doing violence to plain language to construe the section as covering a case in which there has been no genuine attempt to appoint at all. These observations apply equally where the term of office of a director has expired, but he nevertheless continues to act as a director, and where the office has been from the outset usurped without the colour of authority. Cromie’s acts after the end of 1941 were not validated by the section: Strelitz’s acts were at no time validated.
I have so far dealt with defect in “appointment,” and what I have said in regard to the section covers the article also where the same words are repeated. Some argument was founded by counsel for the appellant upon the words “or qualification,” in the section, “disqualified” in the article. This argument is not easy to follow. So far as both Cromie and Strelitz were concerned, there was no defect in their qualification after the end of 1941. They were not disqualified. They were, so far as I know, qualified to act, but they had not been appointed. I do not suggest that qualification refers only to the holding of qualification shares. But whatever extended meaning may be given to “qualification” or “disqualified,” I find it impossible to say that it covers the case of Cromie or of Strelitz. The point may be summed up by saying that the section and the article, being designed as machinery to avoid questions being raised as to the validity of transactions where there has been a slip in the appointment of a director, cannot be utilized for the purpose of ignoring or overriding the substantive provisions relating to such appointment.
I have come to this conclusion unaided by authority, but I am glad to find that it is supported by clear and cogent authority. In Tyne Mutual Steamship Insurance Assoc v Brown, where the facts were that directors had continued to act after their term of office had expired, the meaning of the corresponding section of the Companies Act then in force and of a strictly comparable article had to be considered. Lord Russell of Killowen LCJ having read the article, thus expressed himself (74 LT 283, at p 285):
‘What does this provide? It provides for the cure of defects in the appointment or qualifications of directors … Here there has been no appointment at all.’
He held, therefore, that the article had no application to the case. This authority has stood unchallenged for 50 years, and, though on two occasions since its decision the whole law relating to limited companies has been reviewed by expert committees and amended by the legislature, it has in this respect remained unaltered. This affords strong support for a construction which, in any case, appears to me to be the correct one. I would add that, though no other express authority has been called to the attention of the House, yet the language of Lindley MR and Chitty LJ in Dawson v African Consolidated Land and Trading Co, of Farwell J in British Asbestos Co v Boyd, and of Lord Cozens-Hardy MR and Swinfen Eady LJ in Channel Collieries Trust Ltd v Dover Light Ry Co, clearly indicates that, in the opinion of those judges, the section and article alike deal with slips or irregularities in appointment, not with a total absence of appointment, and still less with a fraudulent usurpation of authority.
Coming to this conclusion, I do not find it necessary to express any opinion upon the question as what is the meaning of the words “afterwards discovered” in the section. I would not be taken as either assenting to, or dissenting from, the proposition, which appears to have been accepted in the courts below, that the section or article can be called in aid by a third party unless and until he has himself discovered the defect in the appointment or qualification of a director. Nor would I express any final view upon what for this purpose amounts to “discovery,” and, in particular, whether the rule as to inquiry is to be imported into the consideration of it.
The appellant having failed, for the reason that I have indicated, to establish his case upon the section or the article, was allowed by the indulgence of the House, although he had not raised the point in his formal case, to contend that he was in any case entitled to succeed by virtue of the rule of law which is conveniently called the rule in Turquand’s case. Upon this contention the House has not the benefit of the opinion either of Cohen J or the Court of Appeal, before whom the point, if taken at all, appears not to have been pressed. The claim under this head refers only to the allotment of the 34 shares which were allotted to Morris on 30 March 1942. Upon this contention two questions appear to arise;(i) whether Morris can in the circumstances invoke the rule;(ii) whether, if he can otherwise do so, he is nevertheless debarred from relief under it upon the ground that he was put upon his inquiry and might, if he had made proper inquiries, have learned the truth.
The first question involves, first, a consideration of Morris’s position when the shares were allotted to him, and, secondly, an examination of the rule in order that it may be determined whether Morris comes within its scope. Though little credence could be attached to the uncorroborated testimony of Cromie or Strelitz, Morris was accepted by Cohen J as a witness of truth, and his evidence agreed with that of the recorded minute of 30 March 1942, which itself is made prima facie evidence by the Companies Act, 1929, s 120(2). It appears then that the board meeting held on that day fell into two parts. There were first present as directors Cromie and Strelitz, with the company’s solicitor in attendance. According to the minute, Cromie:
‘… told the directors that he had received certain proposals from Mr. Lewis Morris which would enable the Rialto cinema to be reopened, and he, as a shareholder, proposed to write a letter to Mr. Morris setting out the terms of the arrangement. The letter was produced and read.’
Upon this is was resolved that Morris be appointed a director of the company and that he be made managing director of the company. Morris, it is recorded, then joined the board. What I must regard as the second part of the meeting with the new board then began, and the minute records that an application from Cromie for 90 shares of £1 each in the capital of the company together with his cheque for £90 was received; that, at his request, the application asked that the shares be allotted 34 to Morris, 32 to Strelitz and 24 to Cromie; and that it was resolved that the shares be so allotted (the numbers of the shares being given); and that it was further resolved that share certificates be issued for all the shares which had been allotted in the company. There were certain further proceedings to which I need not refer. From this narrative it is clear that Morris himself acted as a director in the allotment and issue of the shares, including those allotted and issued to himself. It is, I think, an irrelevant consideration that he had only become a director immediately before that event. Upon this I will say something later. He in fact acted as a director and was the officer and agent of the company in the allotment and issue of shares. That neither his act nor those of his colleagues were valid is for the purpose of this argument assumed. The question is whether he can nevertheless, under the rule in Turquand’s case, claim that he is entitled, as between himself and the company, to treat that act as done with the authority of the company, which was in fact and in law done without its authority.
My Lords, I think that this question admits of an easy answer. The so-called rule in Turquand’s case is, I think, correctly stated in Halsbury, Hailsham Edn, Vol V, p 423:
‘But persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed, and are not bound to inquire whether acts of internal management have been regular.’
It was competent for three directors of the company to allot its shares: three persons purporting to act as directors did allot its shares: therefore Morris, who acted in good faith, was entitled to treat the shares as validly allotted. Thus runs the argument. I leave aside the question what, in the application of the rule, is the meaning of “good faith” and whether Morris, according to the true meaning of those words, acted in good faith, and I ask whether Morris can in any event bring himself within the scope of the rule. My Lords, I think it is clear upon principle that he cannot. In the transaction which he would sustain and Kanssen seeks to impeach, he was himself acting as a director. I asked counsel for the appellants whether there was any authority for the proposition that a director or de facto director could invoke the rule so as to validate a transaction which was in fact irregular and unauthorised. He could point to none. My own researches, though in such a matter they cannot easily be complete, have disclosed no case in which such a proposition has been affirmed. Nor have I met any case in which such a person has, without discussion of the principle, obtained such relief. Nor had I even heard the proposition put forward until I heard it at the bar of the House in this case. The reason is not far to seek.
One of the fundamental maxims of the law is the maxim omnia praesumuntur rite esse acta. It has many applications. In the law of agency it is illustrated by the doctrine of ostensible authority. In the law relating to corporations its application is very similar. The wheels of business will not go smoothly round unless it may be assumed that that is in order which appears to be in order. But the maxim has its proper limits. An ostensible agent cannot bind his principal to that which the principal cannot lawfully do. The directors or acting directors or other officers of a company cannot bind it to a transaction which is ultra vires. Nor is this the only limit to its application. It is a rule designed for the protection of those who are entitled to assume, just because they cannot know, that the person with whom they deal has the authority which he claims. This is clearly shown by the fact that the rule cannot be invoked if the condition is no longer satisfied, ie, if he who would invoke it is put upon his inquiry. He cannot presume in his own favour that things are rightly done if inquiry that he ought to make might tell him that they were wrongly done.
What then is the position of the director or acting director who claims to hold the company to a transaction which the company had not, though it might have, authorised? Your Lordships have not in this case to consider what the result might be if such a director had not himself purported to act on behalf of the company in the unauthorised transaction. For here Morris was himself purporting to act on behalf of the company in a transaction in which he had no authority. Can he then say that he was entitled to assume that all was in order? My Lords, the old question comes into my mind: Quis custodiet ipsos custodes? It is the duty of directors and equally of those who purport to act as directors, to look after the affairs of the company, to see that it acts within its powers and that its transactions are regular and orderly. To admit in their favour a presumption that that is rightly done which they have themselves wrongly done is to encourage ignorance and condone dereliction from duty. It may be that in some cases, it may be that in this very case, a director is not blameworthy in his unauthorised act. It may be that in such a case some other remedy is open to him, either against the company or against those by whose fraud he was led into this situation, but I cannot admit that there is open to him the remedy of invoking this rule and giving validity to an otherwise invalid transaction. His duty as a director is to know; his interest, when he invokes the rule, is to disclaim knowledge. Such a conflict can be resolved in only one way.
It was urged upon your Lordships that the purported appointment of Morris as a director having taken place immediately before the unauthorised allotment of shares, he had in fact no opportunity of learning the true state of affairs, and it was pointed out that, had the proceedings at the meeting of 30 March 1942, been taken in the reverse order, first the allotment of shares, then the appointment of Morris as a director, the result would be different. And then it was said that it was so absurd that there should be a different result according to the order of proceedings, that the original conclusion could not be accepted. This argument has for me no weight or substance. Admit—as, to my mind, one must admit—that a director is not for the purpose of the rule in the same position as a stranger; then it is as immaterial how long he has been a director, as it is whether he is an idle or diligent director, or a robust or sick director.
Concluding as I do that Morris is not a person who in respect of this transaction comes within the scope of the rule, I do not find it necessary to consider the further question whether in any case he would be deprived of its benefits by reason of the fact that, even regarded as an outsider, he was put upon his inquiry and did not make the inquiry that he should have made. This is a question of fact upon which different views have been, and may well be, entertained.
In my opinion the appeal should be dismissed.
LORD UTHWATT. My lords, I agree.