13. ‘X’ company lends to Y company on a mortgage of its assets. The procedure laid down in the Articles for such transactions is not complied with. The directors of the two companies are the same. Is the mortgage binding upon ‘Y’ company.

Facts of the Case

‘X’ Company lent money to ‘Y’ Company against a mortgage of Y’s assets. However, the procedure prescribed in Y Company’s Articles of Association for approving such mortgages was not followed. Notably, the directors of both companies were identical. The key question arose whether the mortgage, executed without complying with the Articles, would be legally binding on Y Company.

Issues in the Case

1. Whether a mortgage executed in violation of a company’s Articles of Association is valid.
2. Whether the identity of directors between the lending and borrowing company affects the enforceability.
3. Liability of the company when proper internal approvals were not obtained.

Legal Principles Covered

1. Doctrine of Indoor Management (Royal British Bank v Turquand, 1856): Third parties dealing with a company are entitled to assume that internal procedures are properly followed.
2. Companies Act Provisions: Non-compliance with Articles may not void a transaction if the party acted in good faith.
3. Conflict of Interest & Director Duties (Section 166, Companies Act 2013): Directors must act in the interest of the company; identical directorship may require scrutiny.
4. Case Reference: Royal British Bank v Turquand establishes that outsiders are protected when acting on company representations unless there is suspicion of fraud.

Possible Judgement

The court is likely to hold that the mortgage is binding on Y Company if X Company acted in good faith and had no reason to suspect procedural irregularities. However, if the directors’ conflict of interest is established or evidence shows bad faith, the mortgage may be set aside. Courts generally protect third-party lenders under the doctrine of indoor management but ensure that company officers act responsibly.

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