Kotla Venkataswamy v. Chinta Ramamurthy (1934) Mad. 579

Introduction

• This case deals with the Articles of Association (AoA) which contain the regulations for management. The AoA can be altered by passing the special resolution.
• The requirements under the AoA must be fulfilled to validate any deeds, hundies, cheques etc. If the deed was not signed by the competent authority according to articles of association, then it will not be valid.

Facts

• The plaintiff (appellant), who brought the appeal, initiated legal action to enforce a mortgage bond worth Rs. 1,000.
• This bond was purportedly executed on behalf of a company known as the South Indian Agricultural and Industrial Improvement Co., Ltd., in favor of an individual named Venkamma.
• Subsequently, Venkamma transferred her rights in the bond to the plaintiff.
• The plaintiff accepted the deed which was signed by the Secretary and the Working Director but not signed by the Managing Director.
• The company went into liquidation and the mortgage property was sold and purchased by defendant no. 4.
• The AoA of South Indian Agricultural and Industrial Improvement Co. Ltd provided that the “all deeds, hundies, cheques, certificates and other instruments shall be signed by the Managing Director, the Secretary and the Working Director on the behalf of the company and shall be considered valid”.
• The main issue in the dispute was if the mortgage bond was properly executed to make the company responsible.
• The Trial Court said that the mortgage bond was not properly executed to make the company liable.

Issue Involved

Whether the mortgage deed was valid executed and make the company liable?

Observations

• The Court observed that the suit document, as has been said, is signed only by the Secretary and the Working Director, and not by the Managing Director.
  • It is said, but not very satisfactorily proved, that the Managing Director had been dismissed and was under prosecution on a criminal charge at the time the document was executed.
  • The mere fact however that the services of the Managing Director were no longer available to the Company will not make execution by the remaining officers any more valid.
• The Court further observed that Article 15 of AoA is intended to authorize the three officers named to execute deeds on behalf of the company that power must reside only in the body of directors as a whole.
• The Court further observed that the Secretary and the Working Director by themselves were not legally competent to execute the mortgage deed.
• The Court said that the execution of the bond was marked by irregularity, yet the mortgagee is entitled to enforce it upon the general principle that there was every reason to believe that the officers who execrated it had authority to do so.
• The Court observed that the directors and the shareholders & the directors exceeded their authority, but this was not known to the plaintiffs and no illegality appeared on the face of the bond, nor were the shareholders prejudiced. If an illegality does & appear on the face of the bond, the plaintiff will not be thus protected.

Conclusion

• The Court held that the deed was not valid as the others were not competent to sign the deed and the plaintiff could not claim under the deed.

Notes

• Section 2(5) of the Companies Act, 2013, ― articles means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act.
• AoA is consists of the rules and regulations governing a company.