Company Law - Capacity, Powers, and Validity

Company Law LAWS797

Capacity, powers, and validity of actions of the company as a legal person

Important Distinctions:

• The Company as a Legal Person

• "Insiders": Directors, Shareholders, and certain other persons.

• "Outsiders": Any other legal persons that transact or otherwise deal with the company.

• It may be difficult to categorize someone as insider or outsider.

Question:

• How can a bondholder be both an insider and an outsider?

General Rule of Capacity (CA 93, ss 16 and 17)

• A company has the same capacity to transact (in its own best interest or otherwise) as any other legal person.

• Historically, the argument was that a company did not have the same capacity.

Effect on Outsiders:

• Outsiders may rely on the transaction as enforceable and enforce it accordingly.

Effect on Insiders:

• The general rule has no particular effect on insiders.

• An insider may have another, different action based on the same facts:

  • As an insider (e.g., shareholder).

  • Who also happens to be an outsider (e.g., contractual creditor).

Exceptions to the General Rule

• If a company representative:

  • Enters into a transaction with an outsider.

  • May not enter into the transaction (under law, constitution, or any other company document).

  • And the outsider knows that the representative may not enter into the transaction.

• Then the outsider may not enforce the transaction (CA 93, s 18(1); Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd).

• This exception applies when the outsider has insider knowledge that something went wrong.

Common-Law vs. Statutory General Rule

• Common-Law General Rule: A company does not have the capacity to transact otherwise than in its own best interest (Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd).

• Statutory General Rule: A company has the capacity to transact in its own best interest or otherwise (Westpac Banking Corp v New Zealand Guardian Trust Co Ltd [see Grantham and Rickett at 273 and 278]).

Grantham and Rickett on Capacity

• The law generally invests all persons with the capacity to make bargains and deal with their property.

• Question: What is capacity? Why does capacity matter? (Understanding, mental bandwidth, contracts being treated as void).

Limited Exceptions to Legal Capacity

• Minors and certain categories of mentally disordered persons are denied full legal capacity.

• At common law, a registered company's legal capacity was limited by reference to the purposes for which it had been established.

• Question: Why limit a company's capacity? How are companies different from natural persons? (Achieve a certain purpose, keep from going outside the purpose).

Ultra Vires Doctrine

• Acts undertaken by the company beyond the scope of its capacity were ultra vires and therefore void.

• The common law’s limitation of corporate legal capacity, encapsulated in the doctrine of ultra vires, has been virtually abolished in respect of registered companies in most Commonwealth jurisdictions.

• Questions:

  • Do you remember any other area of law in which the term "ultra vires" is used?

  • What similarities are there in how the term is used in the two areas of law? And what differences?

Internal Regulations vs. External Dealings

• For regulating internal rights of directors and shareholders, limitations on the company’s capacity may be included.

• However, these limitations are now of no effect against those dealing with the company, even if the latter are aware of the limitations.

• Such knowledge may lead to the avoidance of the transaction on the ground that the company’s directors lacked authority to carry out the transaction, but this is not an allegation of incapacity.

CA 93, s 16: Capacity and Powers

• (1) Subject to this Act, any other enactment, and the general law, a company has, both within and outside New Zealand, full capacity to carry on or undertake any business or activity, do any act, or enter into any transaction; and for the purposes of paragraph (a), full rights, powers, and privileges.

• (2) The constitution of a company may contain a provision relating to the capacity, rights, powers, or privileges of the company only if the provision restricts the capacity of the company or those rights, powers, and privileges.

• There is no point in putting anything in the constitution unless it restricts.

CA 93, s 17: Validity of Actions

• (1) No act of a company and no transfer of property to or by a company is invalid merely because the company did not have the capacity, the right, or the power to do the act or to transfer or take a transfer of the property.

• (2) Subsection (1) does not limit sections 164, 165, 169, or 170 of the Act.

• (3) The fact that an act is not, or would not be, in the best interests of a company does not affect the capacity of the company to do the act.

• Natural persons can enter into things against our best interests, so why can't a company?

CA 93, s 18(1): Dealings between Company and Other Persons

• A company or a guarantor of an obligation of a company may not assert against a person dealing with the company that:

  • This Act or the constitution of the company has not been complied with.

  • Aspects related to a director named in the most recent notice are not valid (e.g., not a director, not duly appointed, no authority). i.e. CA 93, s 159

  • Aspects related to a person held out as a director, employee, or agent are not valid (e.g., not duly appointed, no authority).

CA 93, s 18(2): Dealings between Company and Other Persons

• Subsection (1) applies even if a person with ostensible authority acts fraudulently or forges a document unless the person dealing with the company has actual knowledge of the fraud or forgery.

Rewording s 18(1) to make it easier to understand

• Consider definitions for:

  • Apparent officer (director in name only, general apparent officer, special apparent officer).

  • Company guarantor

  • Company counterparty

  • Defective instrument

No Constructive Notice (CA 93, s 19)

• A person is not affected by, or deemed to have notice or knowledge of the contents of, the constitution of, or any other document relating to, a company merely because:

  • The constitution or document is registered on the New Zealand register; or

  • It is available for inspection at an office of the company.

• Only in certain cases will validity be challengeable.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: Lord Slade

• The basic rule is that a company only has the capacity to do those acts which fall within its objects as set out in its memorandum of association or are reasonably incidental to the attainment or pursuit of those objects.

• Question is whether a particular transaction is within or outside its capacity must depend on the true construction of the memorandum.

• This is the opposite of the company's act as everybody needs to know what's in the constitution.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: Lord Slade

• If a particular act is of a category which, on the true construction of the company’s memorandum, is capable of being performed as reasonably incidental to the attainment or pursuit of its objects, it will not be rendered ultra vires merely because in a particular instance its directors are doing so for purposes other than those set out in its memorandum.

• Subject to any express restrictions on the relevant power which may be contained in the memorandum, the state of mind or knowledge of the persons managing the company’s affairs or of the persons dealing with it is irrelevant in considering questions of corporate capacity [vis-à-vis any third party].

• Note: The “transactions of 22 January 1969” included Rolled Steel’s guaranteeing the debts of another company.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: Lord Slade

• While due regard must be paid to any express conditions attached to or limitations on powers contained in a company’s memorandum, the court will not ordinarily construe a statement in a memorandum that a particular power is exercisable “for the purposes of the company” as a condition limiting the company’s corporate capacity to exercise the power; it will regard it as simply imposing a limit on the authority of the directors [vis-à-vis the company, not vis-à-vis the third party].

• If a company does something outside capacity, shareholders can go against directors.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: Lord Slade

• The directors of a company will not have actual authority from the company to exercise any express or implied power other than for the purposes of the company as set out in its memorandum of association, absent unanimous shareholder consent.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: Lord Slade

• A company holds out its directors as having ostensible authority to bind the company to any transaction which falls within the powers expressly or impliedly conferred on it by its memorandum of association.

• Unless put on notice to the contrary, a person dealing in good faith with a company which is carrying on an intra vires business is entitled to assume that its directors are properly exercising such powers for the purposes of the company as set out in its memorandum.

• Correspondingly, such a person in such circumstances can hold the company to any transaction of this nature.

• Outsiders are treated as outsiders unless they have insider knowledge.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: Lord Slade

• If a person dealing with a company is on notice that the directors are exercising the relevant power for purposes other than the purposes of the company, they cannot rely on the ostensible authority of the directors and cannot hold the company to the transaction.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: Lord Browne-Wilkinson

• The principles of ostensible authority apply to the acts of directors acting as agents of the company, and the rule in Turquand’s case establishes that a third party dealing in good faith with directors is entitled to assume that the internal steps requisite for the formal validity of the directors’ acts have been duly carried through.

• If the third party has actual or constructive notice that such steps had not been taken, they will not be able to rely on any ostensible authority of the directors and their acts, being in excess of their actual authority, will not be the acts of the company.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: Lord Browne-Wilkinson

• The critical distinction is between acts done in excess of the capacity of the company on the one hand and acts done in excess or abuse of the powers of the company on the other.

• Question: What is the critical distinction, in plain English?

• Ultra vires based on the constitution or ultra vires based on best interest?

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: Possible Answer

• More generally, the difference is between:

  • The company being incapable of doing X (i.e. whatever the company does) in any circumstances (incapacity according to the “narrow” or “strict” conception of ultra vires).

  • The company being incapable of doing X for the specific reason why the company is doing X, i.e. otherwise than in the company’s best interests (incapacity according to the “broad” conception of ultra vires).

• Constitution-based ultra vires vs. interest-based ultra vires.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: Lord Browne-Wilkinson

• If the transaction is beyond the capacity of the company, it is in any event a nullity and wholly void: whether or not the third party had notice of the invalidity, property transferred or money paid under such a transaction will be recoverable from the third party.

• If the transaction (although in excess or abuse of powers) is within the capacity of the company, the position of the third party depends upon whether or not they had notice that the transaction was in excess or abuse of the powers of the company.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: Lord Browne-Wilkinson

• As between the shareholders and the directors, for most purposes it makes no practical difference whether the transaction is beyond the capacity of the company or merely in excess or abuse of its power: in either event the shareholders will be able to restrain the carrying out of the transaction or hold liable those who have carried it out.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: Lord Browne-Wilkinson

• I therefore use the words “ultra vires” as covering only those transactions which the company has no capacity to carry out, i.e., those things the company cannot do at all as opposed to those things it cannot properly do.

• Question: Can you think of any “things the company cannot do at all”? Are they “things [only] the company cannot do at all”, as opposed to “things [only] the [natural person] cannot do at all”?

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: On the Facts

• Grantham and Rickett:

  • “[Rolled Steel Products (Holdings) Ltd (“Rolled Steel”)]’s memorandum empowered it to give guarantees”.

• Rolled Steel:

  • “guaranteed the debts of an associated company to [British Steel Corp Ltd (“British Steel”)]”; and

  • “gave security over its own property”.

• “The granting of the guarantee”:

  • “did not further [Rolled Steel]’s business”, but

  • “did benefit one of its directors”.

• At trial, the Court “held the guarantee to be ultra vires [Rolled Steel], as not being for the purposes of [Rolled Steel]”.

• On appeal, “[t]he Court […] held that the guarantee was not ultra vires [Rolled Steel] but was beyond the directors’ authority”.

• Wasn't theoretically good for the company though, only benefited him through his own interest and shareholders could go after director; interest-based ultra vires, not constitution.

Hypothetical: Green Acres Ltd

• The constitution:

  • Empowers it to mow lawns as a business (i.e. for money);

  • Does not empower it to cut trees as a business (and does not mention cutting trees at all).

• The business is carried on by Jack, as:

  • Managing director; and

  • The only person employed by Green Acres (to mow lawns as a business).

• Jack:

  • Believes, incorrectly, that Green Acres owes him $100 (it owes him nothing); and

  • Has a friend, Jill, whom he owes $100.

Green Acres Ltd: Transactions and Ultra Vires

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: What were the facts?

• Rolled Steel Products (Holdings) Ltd (“Rolled Steel”) was the plaintiff, and British Steel Corp Ltd (“British Steel”) was the defendant.

• The case also involved Mr. Alexander Shenkman (“Mr. Shenkman”), although not as a party to the proceedings.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: What were the facts?

• Before the “dispute” arose, there were four particularly material sets of relationships:

  1. Relationships between Mr. Shenkman and:

     • Rolled Steel, Mr. Shenkman being:

       • The majority shareholder (At all material times, Mr. Shenkman held 51 percent of the issued share capital);

       • A director (Rolled Steel’s directors were Mr. Shenkman and his father);

     • Scottish Steel Sheet Ltd (“Scottish Steel”), Mr. Shenkman being sole shareholder.

  2. A relationship between British Steel and Colvilles Ltd (“Colvilles”), British Steel being parent company and Colvilles being subsidiary.

  3. A relationship between Rolled Steel and Scottish Steel, Scottish Steel being creditor and Rolled Steel being debtor (for “about £400,000”).

  4. Relationships between Colvilles and:

     • Scottish Steel, Colvilles being lender and Scottish Steel being borrower (“the whole indebtedness amounted to about £860,000”);

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: What were the facts?

• The dispute arose because “British Steel doubted whether Mr. Shenkman’s [majority shareholding] in [Rolled Steel] and his other assets were sufficient to meet the debt due from [Scottish Steel]” (this debt being guaranteed by Mr. Shenkman).

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: What were the facts?

• The representatives of British Steel and Rolled Steel agreed “in principle” (i.e. informally) to the following “transactions”:

  • “a sum equal to the debt owed by [Rolled Steel] to Scottish Steel should be lent to [Rolled Steel] by Colvilles”;

  • Rolled Steel “should use this sum in repaying the debt owed by it to Scottish Steel”;

  • “Scottish Steel should in turn use this sum to repay part of the debt owed by it to Colvilles”;

  • Rolled Steel “would guarantee the balance of the Scottish Steel debt to Colvilles”;

  • Rolled Steel would also:

    • Issue “a debenture (“the debenture”)” to Colvilles; and

    • Secure this debenture by granting “fixed and floating charges over all [its] assets” to Colvilles.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: What were the facts?

• These transactions were of interest:

  • To Mr. Shenkman, in that:

    • He had personally guaranteed the debt owed by Scottish Steel to Colvilles; and

    • “the proposed guarantee [in d)] and [the] debenture [in e)]” had the potential to help him avoid potentially becoming liable to pay the debt owed by Scottish Steel to Colvilles; but

  • Not to Rolled Steel.

• In fact, “the transactions would not only not be for the purposes or in the interests of [Rolled Steel], but would be positively injurious to it”, in that:

  • The transactions would potentially make it liable to pay the debt owed by Scottish Steel to Colvilles; and

  • Rolled Steel would not benefit from the transactions in any particular way.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: What were the facts?

• On 22 January 1969, Rolled Steel:

  • Held “a meeting of [its] board of directors”, and the board (purportedly) “resol[ved] that the transactions reported to the board be approved and that the [transaction] documents put before the board be approved and executed”; and

  • “executed” the documents.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: What were the facts?

• The memorandum of association of Rolled Steel:

  • Empowered Rolled Steel to “to lend to such persons, firms, or companies as may seem expedient and to give guarantees to or become security for any such persons, firms, or companies” (cl 3(K)); and

  • Made:

    • “the quorum at any meeting of directors” “two” (cls 17 and 18(a)); and

    • The director “count[ing] in the quorum” conditional on him/her “declar[ing] his[/her] interest in a contract or arrangement or proposed contract or arrangement with the company in manner provided by section 199 of the [Companies] Act [1948 (UK)]” on the “[d]isclosure by directors of interests in contracts”.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: What were the facts?

• The meeting of the board of directors “was attended by its only directors, Mr. Shenkman and his father, Mr. Ilya Shenkman”.

• However, Mr. Shenkman “made no declaration of his personal interest at the board meeting”, meaning that:

  • There was no quorum; or

  • In other words, only one (and one too few) of the directors was deemed to be voting at the meeting.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: What were the facts?

• “On 12 March 1969 Colvilles made a demand for payment on 1 April 1969 of the full amount secured by the debenture. On 2 April 1969 the sum secured by the debenture not having been paid, Colvilles appointed Mr. Cooper receiver and manager of [Rolled Steel]”.

• “[T]he receiver paid to British Steel certain sums. The receiver retained his fees and expenses as receiver and manager and then accounted to the liquidator of [Rolled Steel] for the surplus of the moneys received by him This surplus [was] insufficient to meet the other unsecured liabilities of [Rolled Steel]”.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd: What was the question?

• The relevant question was an “important question of principle concerning, inter alia, the capacity and powers of companies incorporated under the Companies Acts and the powers and authority of their directors”.

• The question was whether “Colvilles was entitled to rely on the resolution as a resolution passed at a properly constituted board of directors at which, Mr. Shenkman and Mr. Ilya Shenkman having been the only directors present, a proper disclosure of Mr. Shenkman’s interest had been made; and, if so, to decide that this amendment provided a complete answer in law to the claim against [British Steel et al], in so far as that claim was founded on the no due authorisation point”.

Rolled Steel Products (Holdings) Ltd v British Steel Corp Ltd

• The Court decided in favour of Rolled Steel.

• Essentially, the reason was that on the facts, British Steel knew that:

  • Mr. Shenkman had an interest in “the proposed guarantee [in d)] and [the] debenture [in e)]”; and

  • Rolled Steel did not.

Westpac Banking Corp v New Zealand Guardian Trust Co Ltd: What were the facts?

• Westpac Banking Corp (“Westpac”) and others (the “plaintiff stockholders”) were the plaintiffs, and:

  • New Zealand Guard Trust Co Ltd (“NZGT”), the first defendant;

  • Cory-Wright & Salomon Ltd (“CWS”), the second;

  • Elders Merchant Finance Ltd (“Elders”), the third; and

  • Razorcorp Investments Ltd (“Razorcorp”), the fourth.

• There were three main operations of relevance, the third being the winding-up of CWS.

Westpac Banking Corp v New Zealand Guardian Trust Co Ltd: What were the facts?

• The first main operation was “the issue of debenture stock”:

  • Concluded on 20 June 1983 (“under a debenture trust deed”) between:

    • CWS as issuer;

    • NZGT as debenture holder and (“under [the] debenture trust deed”) trustee debenture holder for:

      • The plaintiff stockholders; and

      • Elders; and

    • “secured by a floating charge”.

• The second main operation was the “provi[sion of a] loan facility” (i.e. loan):

  • Concluded on 27 March 1987 between:

    • Elders as lender; and

    • Razorcorp as borrower, Razorcorp being a subsidiary of CWS; and

    • “guaranteed by CWS”, this guarantee being “support[ed]” by a second “issue of debenture stock”.

Westpac Banking Corp v New Zealand Guardian Trust Co Ltd: What were the facts?

• “Receivers were appointed by [NZGT] on 31 March 1988”, and “[a]n order for the winding up of CWS was made on 21 September 1988”.

Westpac Banking Corp v New Zealand Guardian Trust Co Ltd: What were the facts?

• “Substantial distributions [were] made by the receivers to [NZGT]”, but “[t]he assets [were] not sufficient to meet the claims from all the first-ranking debenture stock holders”, i.e. from the plaintiff stockholders.

• “The principal purpose [of the plaintiff stockholders bringing the proceedings was] to prevent or restrain [NZGT] from making payment to Elders”, i.e. to maximise the repayments to be made to them, the plaintiff stockholders.

Westpac Banking Corp v New Zealand Guardian Trust Co Ltd: What was the question?

• The relevant question was whether “the [second issue of debentures, i.e. the one concluded on 1 October 1987, was] void and invalid for reasons arising out of the issue of it by [CWS]”.

Westpac Banking Corp v New Zealand Guardian Trust Co Ltd: What was the decision?

• The Court decided in favour of NZGT, i.e. that NZGT could “mak[e] payment to Elders”.

Westpac Banking Corp v New Zealand Guardian Trust Co Ltd: What was the reasoning?

• Justice Greig: The ultra vires rule was at base a rule for the protection of shareholders and creditors. It was intended to limit the power and authority of those in charge of companies to those activities of which shareholders and creditors could ascertain by reading the constituting documents of the company.

• It was a balancing consideration against the advantage of limited liability.

• Can only do what the constitution allows.

Westpac Banking Corp v New Zealand Guardian Trust Co Ltd: What was the reasoning?

• Justice Greig (continued): [What became sections 17 of the Companies Act 1993] modif[ied] the doctrine of ultra vires which had become an impediment to the operation of companies and to a great extent, instead of protecting shareholders and creditors, had become a burden and a trap to persons dealing with companies.

• The purpose was to relieve third parties from the doctrine’s restrictions but to retain it internally as between the company, its shareholders and debenture holders.

Westpac Banking Corp v New Zealand Guardian Trust Co Ltd: What was the reasoning?

• Questions:

  • Reminder (CA93, s 17(1) and (2)):

    • (1) No act of a company and no transfer of property to or by a company is invalid merely because the company did not have the capacity, the right, or the power to do the act or to transfer or take a transfer of the property.

    • (2) The fact that an act is not, or would not be, in the best interests of a company does not affect the capacity of the company to do the act

  • How specifically does the wording of section 17 of the Companies Act 1993:

    • “relieve third parties”; but

    • “retain [the doctrine] internally”?

  • How specifically did this case “relieve third parties”?

  • Transaction vis avie 3rd party is valid outside

Westpac Banking Corp v New Zealand Guardian Trust Co Ltd: What was the reasoning?

• Justice Greig (continued): [Westpac]’s first cause of action reads: ‘19. BY clause 14 of its Memorandum of Association [CWS] was empowered to provide guarantees and to give securities only in respect of persons to whom [CWS] had lent or advanced money or given credit. 20. AT no stage did [CWS] lend, advance money or give credit to Razorcorp. 21. IN the premises the provision of the said guarantee by [CWS] and its issue of the… Debenture Stock to Elders was ultra vires [CWS] and accordingly void.’

• Question: Which conception of the doctrine of ultra vires was Westpac using in this cause of action?

• Constitution based (narrow one)

Westpac Banking Corp v New Zealand Guardian Trust Co Ltd: What was the reasoning?

• Justice Greig (continued): [Westpac’s] second cause of action alleges that the issue of the debenture stock [by CWS] to Elders and the granting of the guarantee [of Razorcorp by CWS to Elders] were: ‘22. … gratuitous transactions which could not be said to be for the benefit of [CWS] or otherwise in its interests. 23. THE transactions referred to in the preceding paragraph hereof were not effected for the benefit of or for the legitimate purposes of [CWS]. Alternatively, the said transactions were entered into for purposes not authorised by the Memorandum of Association of [CWS]. 24. BY virtue of the matters set out [above] the directors of [CWS] had no authority from [CWS] to grant the guarantee or to issue the said Secured Debenture Stock to Elders. 25. ELDERS knew or ought to have known that the granting of the guarantee and the issue of the said Stock to Elders were transactions entered into by [CWS] in excess or abuse of the powers of [CWS] or its Directors’

• Question: Why allegedly made the transactions gratuitous? I can't get it interest based (broad) conception

Westpac Banking Corp v New Zealand Guardian Trust Co Ltd: What was the reasoning?

• Justice Greig (continued): [T]herefore CWS is necessarily bound by the debenture stock [issue] and is not entitled to say that that debenture stock and issue was ultra vires. If the company itself is bound by that then a receiver who is acting pursuant to the terms of the debenture stock is entitled and required to make payments to the debenture stock holders in accordance with their ranking. … There may be other causes of action or remedies available to the company or to the plaintiffs but I am not concerned with those at this stage and for the purposes of this judgment. 26. IN reliance on the matters set out in paragraph 25 hereof ELDERS HAS A DUTY to hold the benefit of the said guarantee and Debenture Stock as trustee for all the creditors of [CWS].’

• Question: What would such further “causes of actions or remedies” be?

• Because it was in best interest or the third parties had notice

Westpac Banking Corp v New Zealand Guardian Trust Co Ltd: What was the reasoning?

• Justice Greig (continued): On that cause of action, I conclude that the guarantors cannot succeed in any argument based on any invalidity or lack of authority to issue the debenture stock or to give the guarantee. The guarantors of course are subject to the same disabilities. This is because, pursuant to s 17 of [what became] the Companies Act 1993, the debenture stock is not invalid as against the debenture stock holders because of any lack of capacity, right or power of the company to issue that. Section 18 of that Act provides further protection to that. This is because the debenture stock holders did not have any knowledge that the company was breaching either this Act or the constitution of the company in granting the debenture stock. 27. THE Bank is entitled to repayment and payment in priority to the creditors of [CWS].’

• Question: Is there a difference between sections 17 and 18 re knowledge?

• 17 is valid if you don't have capacity, or power to do the transaction + 18 says company can't say it's invalid for various reasons