8.9 The rule in Turquand’s case/Indoor Management rule

Rule in Royal British Bank vs. Turquand case

In this case the articles empowered the directors to borrow money provided they were authorized by a resolution passed at the general meeting of the Company.

Facts

Mr Turquand was the official manager (liquidator) of the insolvent Cameron’s Coalbrook Steam, Coal and Swansea and Loughor Railway Company. It was incorporated under the Joint Stock Companies Act 1844. The company had given a bond for £2,000 to the Royal British Bank, which secured the company’s drawings on its current account. The bond was under the company’s seal, signed by two directors and the secretary. When the company was sued, it alleged that under its registered deed of settlement (the articles of association), directors only had power to borrow up to an amount authorised by a company resolution. A resolution had been passed but not specifying how much the directors could borrow.

Judgement

Sir John Jervis CJ, for the Court of Exchequer Chamber ruled that the bond was valid, so the Royal British Bank could enforce the terms. He said the bank was deemed to be aware that the directors could borrow only up to the amount resolutions allowed. Articles of association were registered with Companies House, so there was constructive notice. But the bank could not be deemed to know which ordinary resolutions passed, because these were not registrable. The bond was valid because there was no requirement to look into the company’s internal workings. This is the indoor management rule, that the company’s indoor affairs are the company’s problem.

Exceptions to Rule in Turquands’ case

1. Knowledge of the irregularity – a person dealing with Company will not be entitled to protection under this rule if he has noticed that the prescribed procedure as laid down in articles has not been complied with by company.
2. Forgery – the rule does not protect a person where forgery is involved. Company cannot be held liable for forgeries committed by its officers.

In Ruben vs. Great Fingall Company

The secretary of the Company issued a share certificate by forging the signatures of two under seal of the Company. It was contented by the plaintiff that it was not his duty to verify signatures and that whether they were genuine or not was a matter of internal management. The court held that the certificate was not binding on the Company as the rule in Turquand case does not apply to forgery.

3. Negligence on part of the outsider

An individual cannot benefit under the rule in circumstances under which he would have discovered the irregularities had he made proper inquiries.

4. No knowledge of the articles.

A person who did not consult the articles or the memorandum and who consequently did not act in reliance on these documents cannot be protected under the Turquand rule.

5. Acts ordinarily beyond the apparent authority – an outsider will not be protected by the rule if the act of the agent or director of Company is one which is ordinarily beyond their powers.