TMI Blog1946 (3) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... 39, 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 article 8 (7) of the company's articles, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a director, then, Morris having joined the board, they three allotted thirty-four shares to Morris, thirty-two shares to Strelitz and twenty-four shares to Cromie. I will later in this opinion discuss this meeting in greater detail. On or about April 20, 1942, Strelitz transferred seventeen of his shares to Morris. If all the shares were validly issued, the position then was that Kanssen held one share, Morris fifty-one shares, Cromie thirty-two shares and Strelitz sixteen shares In the meantime, on March 30, 1942, and April 13, 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 arid by them transferred to Cromie and to him, and the register of the company should be rectified by altering Cormie'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 directorshi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore Cohen, J., and in the Court of Appeal she major argument was upon the section and article to which 1 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; first whether either section or article has any application to the present case; second, 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; third (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; and fourthly, 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 Kanss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cromie was acting fraudulently as well towards Morris as to other parties. The first question to which I return is whether ( a ) section 143 of the Companies Act, 1929, or ( b ) article 88 of Table A which was adopted by the company has any relevance to the circumstances of the present case. Section 143 of the Companies Act, 1929, which is in the same terms as corresponding sections in previous Acts, provides that "the acts of a director or manager shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification." Article 88 of Table A, which does not materially differ from similar articles in earlier tables, provides that "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 qualifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 in the section "or qualification" and in the article "disqualified." 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scovered" 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 ( Royal British Bank v. Turquand [1856] 23 LJQB 317) . 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 thirty-f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding those allotted and issued to himself. It is, I think, an irrelevant consideration that he had only be come 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 [1856] 25 LJQB 317 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. I think that this question admits of an easy answer. The so-called rule in Turquand's case ( supra ) is, I think, correctly stated in Halsbury (2nd edition), Vol. V, at page 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; thre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght 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 has 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? 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, 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 agains ..... X X X X Extracts X X X X X X X X Extracts X X X X
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