In SR Projects Ltd v Rampersad Re Hindu Credit Union Co-Operative Society (Trinidad and Tobago)  UKPC 24, a majority of the Privy Council overturned the decision of the Court of Appeal of Trinidad and Tobago that a loan taken out contrary to statute was void and so unenforceable, either as ultra vires (outside) the powers of the borrower, or for illegality.
The majority of the Privy Council found that the loan was only illegal, but that this did not make it automatically void. Instead, enforceability had to be tested against more "flexible" factors. Applying these, the majority concluded that the loan and its security were enforceable against the borrower, despite their illegality.
A Credit Union incorporated as a Co-operative Society in Trinidad and Tobago (the Credit Union) had received a loan, in breach of a statutory cap on its total borrowing and deposit taking. The liquidator of the Credit Union argued that the loan was unenforceable against the Credit Union, either because (1) the Credit Union lacked the power to receive a loan when the statutory cap had been exceeded or (2) the Credit Union had acted illegally in receiving the loan.
Majority Decision: an illegality analysis
The majority of the Privy Council held that the loan, and its underlying security, were illegal but enforceable.
Ultra vires vs. illegality
The majority emphasised the "real importance" of the distinction between the rules of ultra vires and illegality.
Ultra vires applies where a person lacks the legal power, or capacity, to act. If a corporation lacks the power / capacity to enter a transaction, the resulting transaction is ultra vires (outside its powers). The transaction is void and cannot be saved, unless the effects of ultra vires have been overridden. (They have been for companies incorporated under the English Companies Acts and the equivalent in Trinidad and Tobago, but not in the Co-operative Society legislation applicable to the Credit Union here).
Illegality is a different concept, which applies where it is against the law for a person to act. An illegal transaction is not automatically beyond a corporation's powers and void. Nor is it necessarily otherwise unenforceable. Whether an illegal transaction stands to be enforced is instead assessed more "flexibly" - for a transaction made illegal by a statute, first by considering what the statute intended and, if this does not give an answer, then by considering public policy factors.
The majority implored that "if a statutory provision is capable of being interpreted as a prohibition [i.e. an illegality] rather than a restriction on the powers of a corporation, such an interpretation is in general to be preferred".
Prohibition or restriction on powers?
The majority held that the statutory cap was properly interpreted as a prohibition, not a restriction on the powers of the Credit Union. They considered the Credit Union to be constituted by its byelaws, which contained an express power to borrow (without a financial limit). They found that the statutory cap was a regulatory overlay, separate from that power - based, for example, on the language of the statutory provisions (e.g. "shall" rather than "shall have the power to").The rules of illegality rather than ultra vires were therefore engaged.
Effect of the illegality on the loan?
The first question was to consider whether the statutory framework prescribed the consequences for the enforceability of a loan contrary to the cap. The majority held that there was "plainly no" express, implied on inferable provision that the loan was void or unenforceable.
The next question was to consider where the public interest in preserving the integrity of the justice system lay, based on the considerations set out by the Supreme Court in Patel v Mirza  UKSC 42. The majority held that this favoured enforcement of the loan. Denying enforcement was a disproportionate response to the illegality, given the availability of regulatory and criminal sanctions for the breach. Further, they held that the public interest would be harmed if the Credit Union could avoid its contractual obligations and so "profit from its own illegal conduct at the expense of a counterparty which acted in good faith."
The Minority Dissent: an ultra vires analysis
There was a strong dissenting judgment that the Credit Union's powers were actually derived from the byelaws and statutory framework taken together and that the Credit Union had acted beyond its capacity by exceeding the cap. The minority considered the correct legal response was that the loan and security were ultra vires and void, with the remedy for the lender an (unsecured) claim in restitution for the loan value against the Credit Union. This position under the general law was what was contemplated by the silence of the statute, properly read.
The minority expressed its concern that the majority's illegality analysis would actually strike a less equitable balance between interested parties. On the facts, they were concerned that the majority approach would give the lender a secured claim, rather than just the claim for the loan value in restitution, and so unfairly elevate the lender'sprospects of recovery over the members with deposits at the Credit Union (which was insolvent).
The scope to make ultra vires based arguments is significantly curtailed for companies incorporated under the English Companies Acts. A quirk of this case was that the Credit Union was not incorporated under the equivalent of the Companies Act in Trinidad and Tobago, but a specialist statute which did not rule out ultra vires.
In practice, parties do seek to escape their payment obligations under financing transactions (and release from other contracts) based on arguments of capacity, illegality and authority, another concept commonly raised alongside the two in play in this case. These arguments can be especially common in, and important for, cross border transactions.
The case highlights the real difference that classifying a rule as going to powers/capacity or not can have for the legal outcome - here whether or not a loan and security, with all the terms the parties had negotiated, could be upheld, or would be unwound. The decision also, however, sounds a strong preference for the Court using the illegality framework - and the Court giving itself the option to enforce a transaction in the right circumstances - where possible.
With thanks to Emma Lai for her assistance in preparing this post.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.