D, Rolled Steel, gave a guarantee to Colvilles. C, British Steel, became the successor to Colvilles upon nationalisation of steel industry, and called upon guarantee agreement. The guarantee agreement was for benefit of a director of D (Shenkman).
At the board meeting where decision to grant guarantee was passed, vote was participated in only by Shenkman and one other director. However D’s articles stated that quorum requirement was 2, and that a director could only count towards a quorum where he had disclosed his interest in a proposed transaction. D thus claimed that as Shenkman had not declared his interest, he did not count towards quorum and therefore decision to enter guarantee was invalid, and thus made in absence of authority. Held:
· Given Shenkman did not disclose his interest, was no actual authority.
· C has constructive notice of article requiring quorum of 2, and article requiring directors to disclose their interest to count towards quorum
Ø i.e. Ernest v Nichols
· Thus necessary to look at whether C can be taken to have known of the internal irregularity causing the lack of quorum?
Ø is true that lack of quorum is an issue of internal procedure
Ø howeverC cannot rely on indoor management rule to overcome lack of quorum.
Ø This is because C saw a signed copy of minutes of D’s board meeting at which it was agreed to provide the guarantee, and these minutes contained no reference to Shenkman having declared his personal interest
Ø Therefore given that D
a. was taken to know of the quorum requirement in articles
b. and knew that Shenkman had not declared his interest
c. D was on notice of internal irregularity.
· Indoor management rule cannot be relied upon by someone with actual notice of irregularity.
· Therefore could be no ostensible authority.