Important decision of Privy Council on ultra vires and illegality

26/05/22

The Privy Council has upheld the appeal of SR Projects Ltd, a company incorporated in Trinidad and Tobago which lent substantial sums of money to the Hindu Credit Union Co-Operative Society (“the HCU”), a co-operative society registered in Trinidad and Tobago under the Trinidad Co-Operative Societies Act, Chapter 81:03.

SR Projects advanced to the HCU a loan of TT$17,772,632 on the basis that the loan was secured by a deed of mortgage over property of the HCU and a promissory note.

At first instance and on appeal in Trinidad and Tobago, the Courts had held that SR Projects was not entitled to enforce its security because the loan had exceeded the maximum liability of the HCU as determined by it pursuant to Regulation 14 of the Co-Operative Societies Regulations (“the Regulations”) and approved by the Commissioner for Cooperative Development (“the Commissioner”), and thus the loan was ultra vires and the security therefor unenforceable.

The Privy Council heard the appeal in October 2021. The panel was split as to the outcome on the novel point of law regarding the consequences of a contract which is entered into in breach of a statutory prohibition:

• Lord Leggatt gave the judgment of the Board, with which Lord Lloyd-Jones and Lord Stephens agreed, allowing the appeal and holding that SR Projects was entitled to enforce its security despite the fact that the loan had been illegal in that it exceeded the maximum liability of the HCU. The Board construed Regulation 14 as imposing a “prohibition”, so that a society which receives a loan or deposit in excess of the maximum liability approved or fixed by the Commissioner was acting in breach of the Regulation and so illegally - but not beyond its powers.

• Lord Kitchin and Lady Arden dissented, holding that they would have dismissed the appeal. In their view, the HCU did not have unlimited capacity to borrow and Regulation 14 meant that it was ultra vires for the HCU to borrow in excess of the maximum limit fixed pursuant to that regulation. They considered that the consequences of such ultra vires lending should be left to the general law and not the law of illegality.

The majority judgment gave important guidance as the consequences of illegality and the history of the ultra vires doctrine, which it described at [43] as a “blunt and unsatisfactory instrument” and which had been heavily attenuated in the context of registered companies but remained applicable to bodies incorporated not under company legislation but under other statutes.

As to the law relating to illegality, the majority of the Board upheld Patel v Mirza [2016] UKSC 42 and noted that the approach laid down in that decision applies across all areas of private law: see [49]. The majority of the Board held as follows in relation to the consequences of illegality and the overlap with the ultra vires doctrine:

• “A critical development has been to see the proposition that a contract prohibited by statute is void, not as a rule of common law, but as, in the first instance, a question of interpretation of the statute.” [52]

• “Where the statute does not provide, expressly or impliedly, that a breach of a statutory prohibition against making or performing a contract has (or does not have) the effect of rendering the contract void or otherwise unenforceable, the court must go on to consider whether the public interest in preserving the integrity of the justice system should result in denial of a claim to enforce the contract.” [53]

• “The more flexible approach applicable where a transaction is illegal means that the distinction between incapacity and illegality which made no practical difference when the doctrine of ultra vires was formulated in the 19th century has become of real importance. The Board considers that, in applying the distinction, it is reasonable to presume, unless the contrary is clearly shown, that the legislature did not intend to nullify transactions otherwise within the express or implied powers of a corporation without regard to whether this is otherwise provided by law or is in the public interest. Thus, if a statutory provision is capable of being interpreted as a prohibition rather than a restriction on the powers of a corporation, such an interpretation is in general to be preferred.” [57]

The minority of the Board, in their dissenting judgment, held at [141] to [156] that, “…the preservation of the ultra vires doctrine serves an important economic purpose that is well illustrated by the circumstances of this case. It provides a measure of protection for the members of such a society against inappropriate and unauthorised risk taking by the officers of the society” and that a lender in the Appellant’s position would not be left without a remedy but would have an unsecured claim in restitution.

The judgment can be found here.