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

8.9 THE RULE IN TURQUAND’S CASE/INDOOR MANAGEMENT RULE

The rule in Turquand’s Case, also known as the Indoor Management Rule or the Rule of Constructive Notice, is a legal principle that provides protection to third parties who enter into transactions with a company. The rule essentially states that outsiders dealing with a company are entitled to assume that the internal management and decision-making processes of the company have been properly followed, even if there may have been irregularities or breaches of internal procedures.

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.