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Key takeaways

  • The Turquand rule clarifies the underlying fundamental principle that, when an outsider enters into a contract with a company in good faith, the outsider can presume that no such irregularities exist and that, as a result, all procedural requirements have been complied with by the company appropriately.
  • When examined in the light of cases, Turquand rule it can be inferred that the rule does not function in an entirely unrestricted manner.

This Doctrine of Indoor Management is a long-standing idea that was created more than 150 years ago in the context of the "Doctrine of Constructive Notice" and has since come to be known as the "Turquand's Rule." The Turquand rule came into existence after the case Royal British Bank v. Turquand.

As a concept, the Doctrine of Indoor Management clarifies the underlying fundamental principle that, when an outsider enters into a contract with a company in good faith, the outsider can presume that no such irregularities exist and that, as a result, all procedural requirements have been complied with by the company appropriately. The government authorities are included within the scope of this doctrine even though it is necessary for outsiders to be informed about understanding of the structure of the specific company's Memorandum and Articles of Association in order to seek redress.

By balancing the scales, the Doctrine of Indoor Management, which is an exception to the Doctrine of Constructive Notice, simultaneously safeguards the proper application of the Doctrine of Constructive Notice. While the Doctrine of Constructive Notice guarantees that the firm is protected from the outsiders, the major goal of the Doctrine of Indoor Management is to ensure that the outsiders are protected from the organisation.

About the case Royal British Bank v Turquand:

Facts of the case

In the present instance, Turquand was given a bond by the directors of Royal British Bank Ltd. (R.B.B.) in exchange for a loan. The directors were permitted to issue such bonds under the Articles of Association with the relevant resolution's approval.

The Articles gave the directors the authority to issue bonds only for the amounts that the company's general meeting decided to occasionally borrow (through the passing of necessary resolution).

However, a resolution enabling the issuance of bonds was not enacted. Additionally, the directors provided Turquand with a bond without the required approval from a resolution.

Later, the loan's repayment fell behind schedule, and the company's liability was evaluated.

Issues raised

In the specific instance, it was unclear if the company (R.B.B.) was responsible for the bond payments.

The rule laid down in Royal British Bank v Turquand

The doctrine of indoor management was established in the case of Royal British Bank v. Turquand.

According to this rule, a third party has the right to assume that a company complied with all requirements for doing an act if it is approved by the articles or memorandum of the company.

In other words, individuals interacting with a business are not compelled to question the legitimacy of internal company processes if they are confident that the planned transaction is not intrinsically in conflict with the Memorandum and Articles.

This means that when they enter into a contract with a business and take into account that the proposed transaction is covered by its Memorandum and Articles, they have the right to assume that the officers of the company have complied with the terms of the Memorandum and Articles.

Outsiders are not responsible for ensuring that the firm complies with its internal rules. It is sufficient if they confirm that the proposed transaction is authorised under the company's charter documents. They are in no position to know what occurs within the company.

Judgment of the Court in Royal British Bank v Turquand

Turquand was permitted to believe that the resolution had been lawfully enacted, therefore it was decided that he may sue on the bonds even though they had not been authorised by a resolution.

A person dealing with a company on a regular basis is entitled to presume that the required compliance or authority delegation to the officer(s) acting on behalf of the company has been made, it was noted. Beyond what is evident and apparent from the scenario, he need not raise any further inquiries.

Lord Hatherley cited the indoor management concept in support of this viewpoint.

He observes: “Outsiders are bound to know the external position of the company, but are not bound to know its indoor management”.

Because Turquand was authorised to presume that the necessary decision of the company in its general meeting (to approve the issuing of bonds) had been passed, the Courts determined that the Royal British Bank was responsible for the bond.

The sole responsibility Turquand had was to make sure the transaction fell under the company's Articles. The company shall be accountable if it does not follow the internal procedures required to give effect to the transaction as long as it determines this.

Turquand had no obligation to find out whether or not the resolution had been adopted.

He might thus file a lawsuit against the company based on the bond. Additionally, the company was bound by the bond.

Exceptions to the Doctrine of Indoor Management

  • Knowledge of Irregularity: This doctrine does not apply in situations where third parties engaging with the corporation were aware that the person they were dealing with on their behalf lacked the necessary authority.
  • This doctrine is not applicable to cases where outsiders who were dealing with the company had the knowledge or very well aware that the said person who was acting on behalf of the company did not have the authority to do so.
  • Forgery: This doctrine does not apply in situations when a fraudulent transaction was carried out by an executive of the company, absolving it of liability.
  • Negligence: If there have been negligent acts, this doctrine does not apply. This indicates that the doctrine is not applicable when a person performs a deed that is not within his or her scope of power or authority.
  • This doctrine is not applicable to cases where negligent acts have taken place. This means that the doctrine does not apply in cases where an act is performed by a person and the same does not come under his power or authority to do the same.
  • Acts outside the scope of the apparent authority: This doctrine is not applicable in cases where the official's alleged behaviour was outside the scope of his or her authority or powers as such an officer.
  • Representation through Articles: The Articles contain a delegation provision that grants the right to delegate authority. It means that the individual doing business with the company may presume that the person claiming to close the deal must have been given the relevant authority.

Conclusion

The common law of agency was modified in the case of Royal British Bank v. Turquand to define the doctrine of indoor management. The Court established the rule to lessen the burdens of the Constructive Notice Doctrine. Its significance becomes apparent when the third party is interacting with an officer or agency other than the Board. The regulation safeguards the interests of the third party with which the Company has a legitimate business relationship and a debt. The rule's main point is that people doing business with limited liability companies are not required to inquire about their indoor management and won't be impacted by irregularities they were unaware of.

  • It is a requirement of the rule that a third party cannot enforce a transaction if the company could not have engaged into it lawfully under the conditions.
  • The rule only provided protection for "outsiders," or those doing business with the company "externally." Directors, on the other hand, were the ones who would typically be expected to be aware of whether internal procedures had been properly followed.
  • Reliance on the rule was invalidated by real notice of the failure to completely follow internal processes.
  • Fourth, an outsider could not depend on Turquand's Case where the substance of the transaction was questionable, such as when the firm's borrowing authority was used for reasons that were completely unrelated to its business and of no advantage to the company.

It becomes clear that the Turquand rule did not function in an entirely unrestricted manner when examined in light of the cases.

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