Sree Minakshi Mills Ltd. vs Callianjee and Sons and Another

Stone, J.—This case raises two points one of which is of some interest. The facts are not in dispute. It is unfortunate that the respondent

who is the respondent to the appeal that raises the only question of any difficulty is not represented so that we have not had the advantage of an

argument in support of the position he would presumably have maintained.

The plaintiffs are a limited Company. The defendants are (1) a firm and (2) The Indian Bank, Ltd.

The firms were at all material times acting as Managing agents of the plaintiff Company pursuant to an agreement. The terms of that agreement

are scheduled to the Articles of Association and Article 132, provides inter alia that the firm"" shall be and are hereby appointed the agents of the

Company for the period and upon the terms provisions and conditions set out in the (scheduled) agreement and the Board is hereby authorised to

execute the said agreement on, behalf of the Company.

Article 149, provides that any preliminary expenses ""and any other costs, charges or expenses, which the Directors consider may be fairly

deemed and treated as preliminary "" may be placed to a separate accountand"" shall be chargeable on the profits or capital of the Company as the

Directors may deem expedient.

Article 100, appoints the first Directors by name.

Article 3 requires the Directors forthwith after the registration of the Company to affix the seal of the Company to the scheduled agreement

aforesaid with power to agree to modifications though only, in one event, subject to the approval of the statutory meeting.

The Company was registered on 15th July, 1921 and on 29th March, 1923 received the certificate empowering it to commence business. The

firm resigned all connection with the Company on or about 7th November, 1921.

Between the date of registration of the Company and the date of resignation of the firm the moneys of the Company were deposited with the

Indian Bank. The firm purporting to act as managing agents purported to operate on that account. There is no question but that under the powers

conferred on the firm by the scheduled agreement the firm had power so to operate.

Between the said dates the firm drew moneys from the Bank for two purposes (1) to pay themselves the remuneration '' reserved by the

scheduled agreement and (2) to pay on behalf of the Company preliminary expenses incurred by the firm for the Company. It is not disputed that

none of the money drawn went into the coffers of the firm except such as went by way of remuneration under the terms of the scheduled

agreement.

The questions arise because in point of fact the scheduled agreement was never executed by the Directors.

As a consequence the Company now claims (1) all the moneys the Bank has paid to the firm as a consequence of the firm operating on the

Company''s account, (2) from the firm all the moneys so drawn by the firm from the Bank.

Counsel for the Company appellants very faintly argued the appeal as against the Bank very properly observing that if the Bank could not be

regarded as put on notice of the need to have the scheduled agreement executed (which notice would impose upon the Bank the duty to ascertain

that the agreement was executed and the firm thereby authorised) the case was covered by Mahony v. East Holyford Mining Co. (1875) 7 E I R

869.

We are clearly of the opinion that though strangers to the Company have constructive notice of the memorandum and articles they are entitled

to assume that the provisions therein contained have been complied with by the officers of the company. Hereby by the articles the Directors are

directed forthwith to execute by affixing the seal of the Company to the scheduled agreement. Strangers to the Company are entitled to assume

that that direction has been carried out and that as a consequence the firm were entitled to act as managing agents with the powers conferred by

the scheduled agreement.

The appeal as against the Bank accordingly clearly fails.

The appeal as against the firm raises points of more difficulty.

It should be noted that if the firm can be regarded as impliedly employed as managing agents there is no question but that they have acted quite

properly.

There is therefore no suggestion that they are to be made liable for any dereliction of duty or because being in a fiduciary capacity they have

betrayed their trust. All the moneys have been expended in ways that would be perfectly proper had the scheduled contract been sealed. In that

event the firm would have been managing agents entitled to draw Rs. 1,000 a month (the amount they actually drew) and empowered to incur and

pay the expenses they actually incurred and paid.

The cases cited by the appellant proceed along the following well-known lines:

(1) Prior to incorporation a company does not exist. Accordingly no contract can be made by it or for it. It cannot be in the position of principal

and accordingly on incorporation it cannot ratify such an agreement. This position has been established law since Kelner v. Baxter (1866) 2 C.P.

C 174, Accordingly no action lies for breach of such a contract In re Northumberland Avenue Hotel Company (1886) 33 Ch. D. 16, Bagot

Pneumatic Tyre Co. v. Clipper Pneumatic Tyre Co. (1901) 1 Ch. 196 Melhado v. Photo Alegre Railway Co. (1874) 9 C.P. 503.

(2) After incorporation but prior to the certificate empowering it to commence business a Company has no power to do business, contracts made

by it are therefore provisional and not binding upon it unless and until the Company is entitled to commence business. See In re ""Otto"" Electrical

Manufacturing Co. (1906) 2 Ch. D. 390.

(3) The Articles of Association do not constitute a contract as between the company and third parties other than shareholders as such or officials

of the Company, e.g., Directors. Consequently the firm cannot enforce those clauses in the articles which provide for the execution of the

scheduled agreement. Eley v. Positive Assurance Co. (1875) 1 Ex. D. 20 and Browne v. La Trinidad (1882) 37 Ch. D. 1 .

It is not proposed to examine the above propositions to see whether they precisely express the law or whether they should be in more guarded

language because without deciding anything we assume in favour of the appellant that as stated they are correct. We also assume without deciding

anything, that the firm here could not have successfully sued the Company for the expenses they had paid; In re National Motor Mail-Coach

Company, Ltd., Clinton''s Claims or for their remuneration as Managing agents In re English and Colonial Produce Company, Ltd. (1906) 2 Ch.

D. 435.

That however does not dispose of this appeal. The firm is not suing the Company. The Company is suing the firm and the action must be for

money had and received. As Lord Mansfield observed in Moses v. Macferlan (1760) 2 Burr. 1005 : 97 E.R. 676 a case which has been

overruled but which has been cited with approval so far as the excerpt we now use is concerned.

This kind of equitable action, to recover back money, which ought not in justice to be kept, is very beneficial, and therefore much encouraged. It

lies only for money which, ex aequo et bono, the defendant ought to refund. It does not lie for money paid by the plaintiff, which is claimed of him

as payable in point of honour and honesty, although it could not have been recovered from him by any course of law, as in payment of a debt

barred by the Statute of Limitations, or contracted during his infancy, or to the extent of principal and legal interest upon an usurious contract, or

for money fairly lost at play; because in all these cases the defendant may retain it with a safe conscience, though, by positive law, he was barred

from recovering.

Although Lord Mansfield calls it an equitable action, it is, in truth, an action which is derived from the old action for debt. It is one of the

actions on the case and for it to lie there must be circumstances which raise an express, or implied contract to pay or what has been described as a

fictitious contract to pay. That is, in the last event the circumstances must be such that by the fiction of a contract the law will impose the obligation

to pay an imaginary debt.

How entirely the action is dependant upon this contractual foundation (though the contract be only a legal fiction) can be seen by perusing

Sinclair v. Brougham (1914) A.C. 398. There it was held that money paid by depositors to a building society pursuant to an agreement ultra vires

the money could not be recovered back by an action for money had and received (though a tracing action lay) because an ultra vires contract is

null and void. There is in such cases no contract express, implied, or fictitious. Therefore the basis of the action for money had and received did

not, in such a case exist.

Now although this aspect of the present case was only glanced at in the argument before us it was sought to meet the observation that no

action for money had and received lay in the circumstances here present by the case of In re. The Bodegaar Company, Ltd. (1904) 1 Ch. D. 276.

That case must be considered. There the article provided that on thehappening of a certain event a Director shall vacate office. The event

having occurred the office was ipso facto vacated and the Board had no power to condone or waive. Onesuch event was entering into a contract

with the Company a director, entered into a secret contract with the Company.. That contract commenced in December and ended in June.

Thereafter he continued to draw his remuneration as Director. At the general meeting in July he retired in the ordinary way and was re-elected.

That happened on two successive years. Then the secret contract was discovered. Then W, ceased toact. Then W sought to sell his shares. The

company claimed the remuneration back and a lien for remuneration paid under a mistake of fact for the two years. It was held that for the period

between the making of the secret contract and the termination of the secret contract W, was not entitled to remuneration as a Director, on the

footing of quantum meruit or otherwise, and that for the fees paid during that period the Company were entitled to recover them back and had a

lien on his shares.

In that case at page 286 Farwell, J., observes as follows: Lord Mansfield, speaking of the action for money had and received in Moses v.

Macferlan (1760) 2 Burr. 1005 : 97 E.R. 676 says:

It lies for money paid by mistake; or upon a consideration which happens to fail.

The mistake on which you can recover must as Bramwell, B puts it in Aiken v. Short (1856) 1 H & N. 210, 156 E.R. 1180 be a mistake ''as

to a fact which, if true, would make the person liable to pay the money; not where, if true, it would merely make it desirable that he should pay the

money.'' That I apprehend means this. If you are claiming to have money repaid on the ground of mistake, you must show the mistake is one which

led you to suppose you were legally liable to pay. The same proposition is really involved in the second head-Total failure of consideration.

As Farwell, J., founded this part of his Judgment on Lord Mansfield we feel justified in placing greater reliance upon Lord Mansfield and his

observations which discourage the view that money can be recovered back simply because the person paying paid without there being any legal

liability to pay.

It is not, however, necessary to disagree with In re Bodegaar Ca., Ltd. (1904) 1 Ch. D. 276 on this point because here there was no mistake.

In that case everybody thought the Director was a Director except the Director, who must have known that, having entered into a secret contract

with the Company, he was not a Director. Here everybody connected with the Company (i.e., the men whose knowledge could be imputed to the

Company) knew that the firm was not the managing agent under any express contract, knew that the firm was acting as managing agents, knew that

the money was with the Bank and was being operated upon by the firm, knew that expenses were being incurred and being paid and being paid by

the Firm with the money of the Company. It may be said this knowledge is not proved (though we think it must be imputed). It is not a question

whether it is proved or whether the knowledge existed. The question is, was the only fact that could be known something quite different so that the

Company, through its officers, was mistaken as to the true position? There is no such evidence. Obviously the Directors could not be mistaken

about the fact that the scheduled agreement was not sealed. They must have known that it was not for they were the officers charged with the duty

of executing it.

Accordingly, in our opinion this case does not fall within In re Bodegaar Co., Ltd. (1856) 1 H & N. 210, 215 : 156 E.R. 1180 A even if that

case on this point was rightly decided. This case falls within the group of instances mentioned by Lord Mansfield where money has been paid to a

person A by. B in circumstance such that A by action could not have recovered the moneys from B but such that there is nothing unconsionable or

improper in A, having been in fact paid, retaining the money.

It follows that the appeal must be dismissed against both respondents. As the first respondent Messrs. Calianjee & Sons, the firm aforesaid,

are ex parte, there will be, so far as they are concerned, no order as to costs. The second Respondent, The Indian Bank, Ltd., are entitled to their

costs.