The Privy Council revisits illegal and ultra vires corporate transactions
In the recent decision of SR Projects Ltd v Rampersad, the liquidator of the Hindu Credit Union Co-Operative Society on behalf of the Hindu Credit Union Co-Operative Society Ltd [2022] UKPC 24, the Judicial Committee of the Privy Council permitted a lender to enforce a secured loan despite the loan being illegal.
In SR Projects, the lender made a secured loan to the society. The loan exceeded the amount set under the local statutory regime applicable to co-operative societies, albeit the officers of the society led the lender to believe otherwise. The society subsequently went into liquidation. The liquidator of the society contended that the loan was ultra vires because it exceeded the statutory limit, and that it was illegal for the same reason, with the consequence that the loan and associated security were void and could not be enforced.
The questions for the Privy Council were whether the true effect of the legislation was to render the society without the power to enter into the loan, or whether the legislation prohibited the loan (i.e. that the loan was illegal) and, in either case, the consequences.
A transaction that is ultra vires is void, however many common law jurisdictions (including England, the Cayman Islands and the British Virgin Islands) have legislated to abolish or modify that rule under local companies statutes. An illegal transaction is not necessarily void: applying the approach of the Supreme Court in Patel v Mirza [2016] UKSC 42, the effect depends on an analysis of the underlying policy considerations and the proportionality of declaring the transaction void.
The PC (by majority) decided that, on a proper construction of the applicable legislation, the society had the requisite power to enter into the loan, but that the loan was prohibited. As for the consequence of this illegal loan, while the legislation contained a regime for fines and other regulatory action, it was otherwise silent as to the effect of a contract that breached the statutory limit. Applying the analysis in Patel v Mirza, the Privy Council decided that lender should be entitled to enforce the loan in circumstances where the lender was misled into believing that the society complied with the statutory limit and that the society entered into the loan freely.
Illegality remains a hot button topic in the common law courts and we believe it will continue to receive significant judicial consideration in the coming years.
