Consents can be given informally

A company, Torvale, granted a debenture to its bankers, Barclays Bank PLC ("the Bank") in 1978. 3i plc held preferred ordinary shares in Torvale. The trustees of the company pension scheme lent £200,000 to Torvale in 1992, secured by two further debentures ("the Scheme Debentures"). Captain Hazelhurst, a director and major shareholder in Torvale, lent approximately £200,000, subsequently increased to approximately £300,000, to Torvale at around the same time, secured by another debenture ("the Hazelhurst Debenture"). The debenture in favour of the Bank had priority over the Scheme Debentures and the Hazelhurst Debenture and, as a result of certain deeds of priority, the Scheme Debentures had priority over the Hazelhurst Debenture.

Under Article 36(iv) of Torvale's Articles of Association, an issue of debentures, except to the Bank, required the consent of 3i as the holder of the preferred ordinary shares in accordance with Article 5. Article 5 provided that such consent should be given in writing or by an extraordinary resolution.

The Bank appointed administrative receivers to Torvale in 1993. Whilst the Scheme Debentures and the Hazelhurst Debenture appeared to be valid on their face, the receivers argued that they might have been granted by Torvale without 3i's consent as required under Torvale's Articles of Association, and that therefore they might be voidable. The receivers applied to the Court for directions, and also for a determination as to whether or not any or all of the debentures were voidable under Section 322A of the Companies Act 1985, which provides that transactions involving a director (or associate) which exceed any limitation on the board of directors, are voidable at the instance of the company, and the director (or associate) involved is liable to account for any gain, and indemnify the company for any loss or damage resulting from the transaction.

The receivers could find no record of any extraordinary resolution passed by 3i nor any written consent. However, evidence showed that a 3i representative actually attended the meeting to seal the Hazelhurst Debenture, and the reason for granting the debenture was to provide security for a loan to be made by Captain Hazelhurst involving an increase in the borrowing powers which had to be approved.

Justice Neuberger considered four separate issues:-

• How the consent of 3i was to be given under the Articles.
• Whether the consent could be given informally.
• Whether the consent had been given informally.
• Whether the Court should affirm the Scheme Debentures.

It was clear that the combination of Articles 5 and 36(iv) required 3i's consent for an issue of debentures by way of written consent or an extraordinary resolution. The absence of any written consent or an extraordinary resolution would result in the debentures falling within Section 322A(i).

However, the principle in Re Duomatic Limited [1969] 2 Ch 365 could be applied to this case so that where a statute or a company's articles provide that an action can be taken only with the consent of a certain group, which consent is to be given in accordance with a prescribed procedure, then, provided that all the members of that group agree to that action, the prescribed procedure is not normally treated as being of the essence. This meant that 3i could, in theory, give their consent to the debentures informally and Section 322A would not apply.

Since a 3i representative actually attended the meeting concerning the Hazelhurst Debenture, he must have appreciated what was going on and that Captain Hazelhurst was about to lend money to Torvale in reliance on the effectiveness of that debenture, and could clearly have voiced his opposition or concern if he had objected. In addition, from 1988 monthly reports on the trading and financial position of Torvale, together with covering letters, were sent not only to the Bank, but also to 3i, in which reference was made to shareholder loans. Although the purpose of that meeting was to execute the Hazelhurst Debenture, the first of the Scheme Debentures was plainly relevant at this meeting and must have been referred to, because the purpose of the meeting was also to execute a Deed of Postponement, not just the Hazelhurst Debenture.

Although the Scheme Debentures fell within Section 322A(1) and were prima facie voidable in light of Section 322A(2), the court had discretion to validate them under Section 322A(7). The individual director whose involvement in the Scheme Debentures brought them within the ambit of Section 322A, however, received no benefit from the transaction and would be unaffected, whether or not the Scheme Debentures survived. He was not acting in his personal capacity but as a trustee. Section 322A was enacted to protect a company in circumstances where its directors exceed their powers, by one or more of their number (or associates) entering into a transaction on behalf of that Company to its disadvantage and to the advantage of one or more of the directors (or associates). The trustees had acted in good faith and reasonably. If 3i¹s consent had not in fact been obtained, this would have been a mere oversight. The Scheme Debentures were therefore held to be valid, and the Hazelhurst Debenture was held over for the factual issues to be examined in more detail.

A consent to an action, like the giving of security, which is required to be given in accordance with a prescribed procedure can be given informally, provided all the members of the group giving the consent agree to the informality.

This note is intended to provide general information about a recent development which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

If you would like further information or specific advice, please contact Tony Evans at Macfarlanes London office.