The holders of valid debentures of a company are not estopped. from disputing the validity of other debentures which have been improperly or irregularly issued (m). Chap. XXVII. § 1 (iv). lender must propriety of Where a company or its directors have power to borrow in Whether manner provided by its articles, the lender may assume that all require evisuch preliminary acts as the passing of resolutions, &c., have dence as to been done as the deed of settlement or articles require; but loan. where the statutory authority provides specially what shall be evidence of the performance of the preliminary acts, the lender must see that they are properly done (n). borrowing powers are This rule, however, does not apply where the power of the Rule where company itself, as distinguished from that of its directors, is limited in point of amount; in such a case, the lender is not limited as to amount. entitled to assume that the prescribed amount is not being exceeded (o); and if the company subsequently acquires further borrowing powers, it cannot, by exercise of those powers, secure the previous advance, which was never a debt binding on the company (p). The rule here referred to is thus explained by Lord Hather- Statement of ley:" Every joint stock company has its memorandum and the rule. articles of association. Those articles of association are open to all who are minded to have any dealings with the company, and those who so deal with them must be affected with notice of all that is contained in those documents. After that, the company entering upon its business and dealing with persons external to it, is supposed on its part to have all those powers and authorities which, by its articles of association, it appears to possess; and all that the directors do with reference to what I may call the indoor management of their own concern, is a thing known to them and them only; subject to this observation, that no person dealing with them has a right to suppose that anything has been or can be done that is not permitted by the articles of association" (q). (m) Mowatt v. Castle Steel and Ironworks Co., 34 Ch. D. 58, C. A. (n) Royal British Bank v. Turquand 6 E. & B. 327; Agar v. Athenæum Life Ass. Soc., 3 C. B. N. S. 725; Fountaine v. Carmarthen Rail. Co., L. R. 5 Eq. 316; Davies v. Bolton & Co., (1894) 3 Ch. 678; County of Gloucester Bank v. Rudry, (1895) 1 Ch. 629, C. A. (0) Chapleo v. Brunswick Building Soc., 6 Q. B. D. 696, C. A.; Lady Wenlock v. River Dee Co., 10 App. Ca. (p) See Exp. Watson, 21 Q. B. D. (9) Mahony v. East Holyford Mining Co., L. R. 7 H. L. 869, at p. 893. See Ernest v. Nicholls, 6 H. L. C. 401; Royal British Bank v. Turquand, 6 E. & B. 327; Biggerstaff v. Rowatt's Wharf, Limtd., (1896) 2 Ch. 93, C. A. Chap. Irregular securities, or securities for an illegal purpose, issued XXVII. by a company to strangers without notice, may be enforced by § 1 (iv). _ them (r). So, where a company incorporated by special Act Bona fide holder for value may enforce irregular securities. Quorum of directors. Informal and incomplete charges supported in equity. was empowered to borrow on mortgage such sums as might be from time to time authorized by a general meeting, not exceeding a specified amount, and issued debentures to an extent not exceeding that limit, but without the sanction of a general meeting, it was held that the proviso requiring such sanction was merely directory, and not one which it was obligatory on the debenture holders, in order to support their security, to show had been performed by the company (8). So, where the directors of a company had power under the articles to fix a quorum, and by resolution fixed three as a quorum, and, at a meeting of the directors at which only two were present, the seal of the company was affixed to a mortgage, it was held that as between the company and the mortgagees who had no notice of the irregularity, the execution of the deed was valid (f). In some instances, where resolutions of a company or of its directors have authorized a loan, but no formal or complete mortgage has been made, the Courts have held that the effect of the resolutions was to create valid equitable charges (u). But where there are no minutes authorizing the loan (x), or where the holder has notice of the irregularity (y), or where the resolu tion purporting to create the charge has not been communicated to the creditor (2), no charge is created. Where the form given by the Act was not followed, the mortgage was notwithstanding valid against a creditor (a); and where certain formalities were required by the articles, a deposit of title deeds and a memorandum signed by the manager, though with authority, were held invalid; but the deeds were (r) Bryon v. Metropolitan Saloon Co., 3 De G. & J. 123; Fountaine v. Carmarthen Rail. Co., L. R. 5 Eq. 316, 322; Re Marseilles Extension Rail. Co., L. R. 7 Ch. 161. (s) Landowners, &c. Co. v. Ashford, 16 Ch. D. 412. (t) County of Gloucester Bark v. Rudry, Merthyr, &c. Coll. Co., (1895) 1 Ch. 629, C. A.; Re Bank of Syria, (1901) 1 Ch. 115, C. A. See Davies v. Bolton & Co., (1894) 3 Ch. 678. (u) Re Strand Music Hall Co., 3 De G. J. & S. 147; Re General South American Co., 2 Ch. D. 337, C. A.; Prince of Wales, &c. Co. v. Athenæum Ass. Soc., 1 E. B. & E. 183; Royal British Bank v. Turquand, 5 E. & B. 428, affirmed 6 E. & B. 327; Agar v. Athenæum Life Ass. Soc., 3 C. B. N. S. 725; Re Tilbury Portland Cement Co., 62 L. J. Ch. 814. (x) Re General Provident, &c. Co., 17 W. R. 514. (y) Re Magdalena, &c. Co., John. 690. (2) Re Wynn Hall Coal Co., L. R. 10 Eq. 515. (a) M Cormick v. Parry, 7 Exch. 355. not ordered to be delivered up (b). And so the power, though informally exercised, has been held sufficient; as where directors being empowered to raise money by debentures, gave them to a contractor for the cost of work done, instead of issuing them to him for money and then handing him back the amount (c). Chap. XXVII. § 1 (iv). SECTION II. OF THE DIFFERENT KINDS OF SECURITIES GIVEN BY COMPANIES. i. Mortgages, &c. by Companies generally.-The securities Companies' given by companies are mortgages, debentures, debenture stock, securities. and bonds, the form, validity, and effect of which instruments depend upon and vary according to the powers under which they are issued, and the property, if any, included in each instrument (d). pany. A mortgage by a company does not differ, in point of form, Form of mortfrom one given by an individual, except that if it is given to gage by comsecure outstanding or future bills of exchange or promissory notes at maturity the covenant for payment of principal and interest should be omitted, so as to prevent the merger of the simple contract debts in a specialty security for the same debt (e). ii.-Debentures.-Generally speaking, a joint stock company, Power of having under its memorandum of association express or implied company to power to borrow on mortgage, may by its articles or by special tures. resolution empower itself to issue debentures to secure moneys advanced for the purposes of the undertaking, and authorize its directors to issue the same (ƒ). Having regard to the provisions of the Companies Act, 1900 (g), Meaning of with respect to the registration of any mortgage or charge for tures." (b) Re General Provident, &c. Soc., 17 W. R. 514. See Exp. National Bank, L. R. 14 Eq. 507. (c) South Essex Gaslight Co., 2 J. & H. 306; Re Inns of Court, &c. Co., L. R. 6 Eq. 82. Shears v. Jacob, L. R. 1 C. P. 513; approved, Deffell v. White, L. R. 2 C. P. 144. (d) Bryon v. Metropolitan Saloon, &c. Co., 3 De G. & J. 123. (e) See Key & Elph., 7th ed. vol. ii. p. 168. See Dav. Conv. vol. ii. pt. ii. (f) Bryon v. Metropolitan Saloon, &c. (g) 63 & 64 Vict. c. 48. term "deben Chap. XXVII. § 2 (ii). Debenture need not be under seal. Single deben ture. Meaning of "issue." Mortgage debentures and simple debentures. the purpose of securing any issue of debentures or debenture stock, it is important to determine what instruments are denoted by the term "debentures." No precise legal definition of the expression "debenture" has been given by any statute or reported judicial decision. "It is not either in law or in commerce a strictly technical term, or what is called a term of art" (h). The expression occurs in several statutes, and has given rise to decisions as to its meaning for the purposes of the particular Act. Thus, it has been held that an instrument, though not purporting to be a debenture, may be a "debenture" for the purposes of the Bills of Sale Act, 1882, so as not to require registration (i); and it would seem that, generally speaking, an instrument creating a charge on the property of a company may be treated as a debenture, though not expressly purporting to be such (). Conversely, it was held that an instrument purporting to be a debenture was chargeable as such with stamp duty, though it was in effect a mere promissory note, which is not ordinarily regarded as a debenture (7). Debentures are usually given under seal, but this is not essential to their validity, if the articles empower the directors to issue debentures under hand only signed by some of their number (m). Debentures are usually issued in a series, entitling each holder to rank pari passu with other holders forming part of the same series; but a debenture may be a single instrument (n). Debentures are "issued" when they are delivered, so as to give the holder the right to deal with them (0). Debentures are of two kinds, namely, mortgage debentures, which are charges of some kind on property, and debentures, which are mere bonds either simply amounting to an acknowledgment of indebtedness, or coupled with an undertaking to pay the principal and interest thereon till payment (p). (h) Per Chitty, J., in Levy v. Abercorris Co., 37 Ch. D. 260, at p. 264. See British India, &c. Co. v. Commissioners of Inland Revenue, 7 Q. B. D. 165, 172; Edmonds v. Blaina Furnaces, 36 Ch. D. 215, 219. (i) Levy v. Abercorris Co., sup. (k) See Enthoven v. Hoyle, 21 L. J. C. P. 100; Gardner v. L. C. & D. Rail. Co., L. R. 2 Ch. 201. (1) British India, &c. Co. v. Commis sioners of Inland Revenue, 7 Q. B. D. 165. (m) Ibid. (n) Levy v. Abercorris Co., 37 Ch. D. 260; Robson v. Smith, (1895) 2 Ch. 118. (0) Mowatt v. Castle Steel, &c. Co., 34 Ch. D. 58, 62, C. A. See Re Bircham, (1895) 2 Ch. 786, C. A. (p) See per Lindley, J., in British India, &c. Co. v. Commissioners of Inland Revenue, 7 Q. B. D. 165, at P. 172. Chap. XXVII. The charge on property by which a mortgage debenture is secured may be created by a separate covering deed of trust, or by the debenture itself, or partly by a trust deed and partly by § 2 (ii). debentures. How charge created. Trust deeds debentures. Debenture trust deeds are executed where it is desired that the legal estate in the property charged shall pass to trustees so as to to secure ensure the priority of the security, and so as to enable them to protect the interests of the debenture holders, and in case of default to enter and sell, &c., without any application to the Court. Trust deeds are usually considered advisable in the case of charges upon ships, letters patent, and where debenture holders are to have the option of exchanging debentures to bearer for registered debentures and vice versa. The practice of issuing debentures covered by a trust deed is more common than formerly, as it is found that debentures so secured are attractive to investors. Trust deeds are also often thought advisable to secure deben- Debentures tures issued by companies carrying on business abroad, and foreign land. charged on intended to be charged on land in a foreign country. Trusts declared by such deeds will be enforced by the English Courts against the trustees and the company (q), according to the well-settled rule that equity, as it acts primarily in personam, and not merely in rem, may enforce, as between persons residing within the jurisdiction, trusts affecting land situate out of the jurisdiction (). It must, however, be borne in mind that trusts are not recognized by the laws of many foreign countries, and accordingly difficulties may arise and expense be incurred incident to the devolution of the property comprised in the security; and, moreover, if debentures are charged on land in a foreign country otherwise than in accordance with the laws of that country, although the Court here will as far as possible enforce the contract according to English law, and without regard to the law of the foreign country (s), yet the omission of formalities required by the law of that country for the validity of the charge may nullify, wholly or in part, the practical effect of the decision of an English Court. (a) See Holroyd v. Marshall, 10 H. L. C. 191. (r) Penn v. Baltimore, 1 Ves. Sen. 444. See S. C., and notes thereto in Wh. & Tu. L. C. Eq. (7th ed) vol. i. p. 755. See also Ewing v. Orr-Ewing, VOL. I.-C. 9 App. Ca. 40; Mercantile, &c. Co. v. K K |