Company law revision question and answer

Rush, Fast and Speed are directors of Modern Technology Company Ltd. The company was formed with the main object of computer training. However, due to the power rationing, the company business has fallen below the expected productivity and is threatened with closure. In order to keep afloat, the three directors approached Money Bank Ltd for an overdraft of Sh. 2 million to establish an off-licence bar and restaurant within the city centre. The credit manager asked the company to provide its copy of the memorandum of association and the company complied. Modern Technology was then given the overdraft. However, it has run into financial difficulties and is unable to repay the loan.

Can the bank successfully sue for recovery of the loan?

This problem is based on abuse of power directors otherwise called excesses of
directors or “better still” transactions ultra viresthe directors.
• In this case directors of Modern Technology Co. Ltd borrowed from Money Bank Ltd for a purpose other than that for which the company was incorporated and the credit manager of the bank had a copy of the company‟s memorandum of association hence the doctrine of constructive notice, he was deemed to know that he company was borrowing for a wrong purpose.
• The borrowing in this case intra vires the company but ultra vires the directors.
• The borrowing is voidable at the option of the company.

• Money Bank Co. Ltd cannot recover the loan on account that:
– It is deemed to know the contents of the company‟s public documents.
– It‟s the creditor manager had a copy of the company‟s memorandum of association but failed to satisfy himself that the company was borrowing for its purposes.
– It is a party to the abuse of the power to borrow and cannot therefore recover the loan.
• This position is consistent with the decision in re Introduction Ltd (1968) where a company formed to entertain and accommodate visitors in the UK borrowed from the plaintiff bank to promote Pig breeding which was not an objects clause. It was held that since the bank had a copy of the company‟s memorandum and hence aware of the abuse of power, it was privy thereto and could not enforce the borrowing.

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