CASE 8

The directors of Claridge Supply Company Ltd. approached the Business Bank for a loan. One of the two directors of the corporation attended at the bank and, in the presence of the branch manager, signed the loan application. He then took the documents with him in order to have the corporate seal affixed and to obtain the signature of the other director on the documents. A few days later, the director returned with the signed loan application and documents that purported to be directors' resolutions authorizing the pledging of the corporation's assets as security for the loan. Attached to the resolutions were the secretary's certificates confirming that the resolutions were duly passed by the directors.

Some months later, Claridge Supply Company Ltd. was declared bankrupt, and the trustee in bankruptcy refused to recognize the bank's secured loan on the basis that the corporation's minute books contained no record of any resolutions authorizing the pledging of securities for the loan. The bank then took legal action for a declaration that it was a secured creditor.

Discuss the basis of the bank's claim and the likely outcome of the action.