Can An Illegal Loan Be Enforced?

• Published date: 05 October 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Criminal Law, Corporate and Company Law, Contracts and Commercial Law, Trials & Appeals & Compensation, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Norton Rose Fulbright
• Author: Mr James Lockwood and Emma Cridland

In SR Projects Ltd v Rampersad Re Hindu Credit Union Co-Operative Society (Trinidad and Tobago) [2022] UKPC 24, a majority of the Privy Council overturned the decision of the Court of Appeal of Trinidad and Tobago that a loan taken out contrary to statute was void and so unenforceable, either as ultra vires (outside) the powers of the borrower, or for illegality.

The majority of the Privy Council found that the loan was only illegal, but that this did not make it automatically void. Instead, enforceability had to be tested against more "flexible" factors. Applying these, the majority concluded that the loan and its security were enforceable against the borrower, despite their illegality.

Background

A Credit Union incorporated as a Co-operative Society in Trinidad and Tobago (the Credit Union) had received a loan, in breach of a statutory cap on its total borrowing and deposit taking. The liquidator of the Credit Union argued that the loan was unenforceable against the Credit Union, either because (1) the Credit Union lacked the power to receive a loan when the statutory cap had been exceeded or (2) the Credit Union had acted illegally in receiving the loan.

Majority Decision: an illegality analysis

The majority of the Privy Council held that the loan, and its underlying security, were illegal but enforceable.

Ultra vires vs. illegality

The majority emphasised the "real importance" of the distinction between the rules of ultra vires and illegality.

Ultra vires applies where a person lacks the legal power, or capacity, to act. If a corporation lacks the power / capacity to enter a transaction, the resulting transaction is ultra vires (outside its powers). The transaction is void and cannot be saved, unless the effects of ultra vires have been overridden. (They have been for companies incorporated under the English Companies Acts and the equivalent in Trinidad and Tobago, but not in the Co-operative Society legislation applicable to the Credit Union here).

Illegality is a different concept, which applies where it is against the law for a person to act. An illegal transaction is not automatically beyond a corporation's powers and void. Nor is it necessarily otherwise unenforceable. Whether an illegal transaction stands to be enforced is instead assessed more "flexibly" - for a transaction made illegal by a statute, first by considering what the statute intended and, if this does not give an answer, then by considering public policy factors.

The majority...