Table of Contents
Abstract
This paper is founded on a key principle of company law known as corporate personality. It argues that upon registration and issuance of a certificate of incorporation, the company acquires a legal personality that is distinct from those who control it. As such, if the company took out a loan from the bank, then it has an obligation to repay it under the law or the guarantor if it cannot do so. In addition, it also argues that the Bank can enforce its loan of €1,000,000 against the company under section 82 (2) as reading with subsections 5 and 6 thereof. Thus, the loan issued to the company is lawful and recoverable from the company.
Keywords: Legal, Loan, Distinct Personality
Introduction
Since the ruling by the House of Lords in leading case of Salomon vs. Salomon & Company Ltd 1, a key principle of company law was established. In this regard, companies have thus been held as having a separate corporate personality from the persons who control it. Consequently, it can take out a loan in its name as it did in this instance, which can only be recovered from it and not its managers or guarantors who have done so voluntarily. Moreover, it is entitled as an entity under section 82 of the Irish Companies Act 2014 to give financial assistance to an individual to acquire its shares. The essence of this section of the said Act is to protect creditors’ interests in situations where it has issued a loan to a company in good faith.
In this paper, it is argued that the Western Bank PLC can recover the loan from Home Dreams LTD. To achieve this, the first part of the paper argues that Home Dreams LTD is a distinct legal personality from its owners with a limited liability on the debts it acquires in the course of its operations. It asserts that the loan can only be recovered from Home Dreams LTD and not Alyson due to the limited liability that accrues to the company. In the second part, the paper explains that under section 82 (2) as read with sub-section (5) and (6) and case law, the issued loan was legal and can thus be recovered from the company. The last portion will be a conclusion, which revisits the legality of the loan based on the principle of corporate personality as well as section 82 of the said Act.
Corporate Personality of Home Dreams LTD and the Guarantor’s Obligation to Pay
Upon the registration of a company in Ireland, the once the company is incorporated it acquires a complete legal personality that is distinct from its owners. As such any dealings, it enters into are distinct and separate from the members of the same company. Therefore, it can negotiate and enter into lending agreements with banks as a distinct personality. Thus, when Home Dreams LTD entered into this agreement, it was bound by its legal commitments to repay the loan under the contract. Whether the loan was acquired on behalf of Alyson so that she could acquire the shares of the company is immaterial in determining the obligations of the company.
It is the assertion here that Home Dreams LTD and Alyson the shareholder of the company are distinct and separate persons. Therefore, the bank lacks a legal basis to recover the loan from any other entity apart from the company. In Macaura vs. Nothern Assurance Co The House of Lords ruled based on that a company has a distinct legal personality from its owners. Even though the case dealt with the issue of insurable interests, its recognition of the separate legal personality is relevant in the present circumstances. Home Dreams LTD and Alyson have separate legal personalities, which must be considered as such.
With regard to the aforementioned, the Bank negotiated with the company and not the person on whose behalf the former took out the loan. It committed itself to the terms of the lending agreement to finance the expansion of the expansion of housing development in the greater Dublin area. Therefore, it is bound by its commitment to the contract as a distinct legal personality from its owners. This obligation cannot be transferred to its members since they were not represented in the lending negotiations. The actions or inactions of the company cannot be regarded as being the same because the company is deemed to have acted independently of its owners who make it.
Therefore, the Bank has a right to recover the said amount owed and any attendant interests from the company in question. From the preceding, Home Dreams LTD is under obligation to honour its commitments under the lending contract with the bank. Borrowing from the House of Lords ruling in Macaura, the sole responsibility to repay the loan rests with the company since it took out the loan as an entity. Consequently, it must live to its legal duty to repay the loan and interest thereof according to the contract under which it received money from the bank. The company entered a legal debt. Therefore, bears a legal responsibility to pay it up.
If a company cannot live up to its expectations under a lending contract, the Irish law protects the persons with whom it does business through personal guarantees. Therefore, if the company cannot meet its legal obligations, its managers can be called upon to meet such obligations on its behalf. From the facts of this case, Mr. Michael Andrews, a director of the company gave a guarantee that he would pay the loan if the company defaulted on its payment. Notably, this is a second and last protection that is afforded to creditors under the Irish Company Law. The bank has a right to enforce the payment of the loan from Mr. Andrews personally if the company is unable to meet its obligation under the loan agreement.
Mr. Andrews has to pay the loan not because the concept of legal personality is ignored in this case. This is because he gave a surety through the guarantee that in the event the company could not pay up, he would be responsible for the same. In addition, he bears the responsibility as contrary to the principle of corporate personality because he guaranteed the loan in question. As such, his obligation to pay is not directed towards him but on behalf of the said company. This is because the company is a legal entity in its right complete with entitlements and obligations that can only be modified by agreements comprised in the guarantee clause in the loan contract.
Therefore, by guaranteeing the loan, Mr. Andrews took the risk to pay on behalf of the bank and cannot distance it from the obligation to pay the owed sum. By guaranteeing the said loan, Mr. Andrews signalled to the bank that it was safe to lend to the company. In this case, any argument contrary to the flow of rights and obligations of the parties in the contract will be an affront to the independence of parties to contract. The transfer of the obligation to pay if the principle borrower fails is a product of the voluntary agreement by Mr. Andrews to pay the loan amount. Therefore, the bank can go ahead and recover the same amount and interests from him as a matter of right under the contract.
In the case of Ulster Bank Ltd v Roche & Buttimer the High Court in Ireland held that a bank could recover money owed by a company from the personal guarantor of a company loan. Moreover, this ruling was premised on the fact that the bank did not have a constructive knowledge that guarantee was by an undue influence by a third party unconnected with the loan. In this regard, the bank did not have any knowledge in the circumstances of any undue influence being exerted by a third party in this case Alyson. In any event, there is no evidence that Alyson compelled the director (Mr. Andrews) to guarantee the said loan.
Secondly, the company did not exert any undue influence on the director to give a personal guarantee on the said loan. In the case of Ulster Bank Ireland Limited v Louis Roche & Another The court similarly held that a bank guarantee that was obtained by undue influence was unenforceable. Therefore, the court held that the bank could not rely on the bank guarantee obtained in this manner to recover amounts owed to it. On the contrary, in the present case, the bank can recover the said amount from Mr. Andrews who is not in any way connected with the bank other than as a trusted client. His decision to guarantee the loan was voluntary and therefore enforceable against Mr. Andrew under the Irish law.
Recovery under Section 82 of the Irish Companies Act, 2014
The second limb of this argument is that the company legally facilitated the acquisition of a loan under section 82 of the Companies Act No. 38 of 2014. This is because the Act states in section 82 (2) that it is illegal for a company to give financial assistance for anyone who wants to acquire its shares. A plain reading of this law seems to suggest that the loan acquisition was illegal in the circumstances in which it was issued. This is because capital can only be parted with by the company for reasons that are supported by the Irish Companies Act 2014.
In Re: Exchange Banking Co (Flit Croft’s Case) Jessel, M.R. stated the following words that guide the reasoning in this part:
“A limited company by its Memorandum of Association declares that its capital is to be applied for the business. It cannot reduce its capital except in the manner and with the safeguards provided by statute. One reason for this is that there is a statement that the capital shall be applied for the business, and on the faith of that statement, which is sometimes said to be an implied contract with creditors, people dealing with the company give it credit. The creditor has no debtor but that impalpable thing the corporation, which has no property except the assets of the business. The creditor, therefore, gives credit to that capital, gives credit to the company on the faith of the representation that the capital shall be applied only for the business…”
The loan agreement was presented as one, which was aimed at financing the financing of the company’s activities. As a result, the bank’s belief at the time of lending was that it was aimed at financing the development of a new construction project in the greater Dublin area. From this fact alone, the bank was under a genuine belief that the company was borrowing as permitted by statute and the company’s constitutive documents. Under the banking regulations in Ireland, this is not regulated, and the obligations of the bank cannot be deciphered by looking therein. However, under the Companies Act 2014, the bank is under an obligation to ensure that the lending was by the constitution and financing of new developments was one.
In Trevor vs. Whitworth Lord Watson stated among others that creditors were entitled to presume that capital was used for purposes sanctioned by the constitutive documents of the company. In this regard, the bank carried out its duties and legally presumed that the money was to be used for the legitimate purposes of the business. The court argued that the banks are under a right to presume that the money was to be used for the business. Therefore, they are under no duty to carry out a due diligence procedure beyond what they believe and that which has been brought to their knowledge. Therefore, the argument by the company that the loan agreement was illegal whether the bank knew of its purpose or not lacks a legal basis sufficient to refute the bank’s claims.
A further reading of sub-section 82 upholds the bank’s claims of its entitlement to recover the amounts owed from the debtor company. This is because it supports the legality of the loan issued to the company hence the claim of illegality by the company fails the test of legal scrutiny. Foremost, subsection 5 paragraph (b) of section 82 provides that a company can give legal, financial assistance to a person for the acquisition of its shares. This is so if the financial assistance by the company for purposes that are partly incidental to the larger purpose of the company. Notably, the company wanted to engage Alyson Morison an experienced and expert developer for a project in the Greater Dublin area. Housing is the main objective of the company’s existence but its lending to Alyson to facilitate the acquisition of shares is part of the larger purpose of the company.
The company financed Alyson’s acquisition of its shares through a loan in return for their commitment to the proposed development in the greater Dublin region. Therefore, whether the purposes was achieved or not is immaterial because the financial assistance in the reading of section 82 (5) (b) was legal. In light of these facts, the company cannot deny its obligation to repay the loan to the bank given that the transaction is supported by the Ireland Companies Act, 2014. In the East African case of Standard Bank Limited v Mehotoro Farm Limited & 2 others the court held that only illegal financial assistance excuses a party from attendant obligations. However, in this case, the transaction between the company and Alyson was proper by the existing law.
Secondly, the Act creates a further exception under section 82 (6) (c) where the financial assistance is given for liabilities that have been duly incurred by the company. This is because the company engaged Alyson on a consultancy basis for the proposed development in the greater Dublin area. The company can be assumed to have paid for the services that were to be rendered by the said person. From the preceding, the lending transaction was legal given that the company is legally permitted to assist potential shareholders in acquiring its shares. Engaging Alyson was a liability that the company had incurred and was thus using the financing agreement to pay for the proposed services. Therefore, the company’s director’s argument that the transaction was illegal is legally insufficient.
We can do it today.
Conclusion
From the facts, supporting case law, and statute, the company is liable to pay the bank the amount of the loan and the accrued interest. This is because the company had a duty to honour its obligation under the contract with the bank where it was issued with the said loan of €1,000,000. If it cannot do so, then Mr. Andrews as the guarantor of the company as a distinct entity has the obligation to pay for the same. Moreover, the company is liable to pay the loan and interest from that place because the bank relied on its presentation that the purposes were legitimate. On the contrary, the alleged illegal financing for the purchase of the company’s shares was legal subject to section 82 (2), (5), and (6) of the Irish Companies Act 2014.
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