Remedies of the ultra vires lender, Business Law and Ethics

Remedies of the Ultra Vires Lender:

                         In Sinclair v Brougham (26) the House of Lords explained that no action or suit lies at law or in equity to recover money lent to a company which has borrowed for an ultra vires purpose. This means that the ultra vires lender cannot sue, as lender, to recover the money he lent to the company. However, he might avail himself of one or other of the following remedies which were summarised by Buckley, J. in Re Birkbeck Permanent Benefit Building Society:

i.        If the result of the transaction is that the indebtedness of the company is not increased because the new loan was applied in discharging an old debt, the invalid lender can be treated as standing in the place of those whose debts have been paid off. In such a case the ultra vires loan "is not to be regarded as a borrowing transaction".

ii. The aforesaid remedy would also be available if the loan was applied in discharging a future debt (ie an indebtedness which was incurred after the money was borrowed).

The basis of this remedy is that, since the company could legally become indebted in respect of the future debt, the lender whose money discharged it would be subrogated to the rights of the discharged creditor. However, he would be entitled to rank as a creditor of the company only to the extent to which his money was applied in discharging the intra vires debt and would not obtain the benefit of any security held by the intra vires creditor (although he would be entitled to enforce any security which was given to him).

iii.  If the lender can identify his money or the investment of his money in the hands of the borrowing company, he can call for its return.

The basis of this remedy was explained by Lord Parker in Sinclair v Brougham (26) as follows:

"A company or other statutory association cannot by itself or through an agent be party to an ultra vires act. If its directors or agents affecting to act on its behalf borrow money which it has no power to borrow, the money borrowed is in their hands the property of the lender."

iv.  If the lender cannot bring himself within any of the above propositions he would have no remedy except to participate in the division of the company's surplus assets, if any, which would be divisible among the ultra vires creditors rateably during the company's liquidation after all the company's members have received back their capital in full.

Posted Date: 1/12/2013 2:38:01 AM | Location : United States







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