Company Law

Royal British Bank v. Turquand

(1856) 6 E&B 327

Citation: (1856) 6 E&B 327
Court: Court of Exchequer Chamber
Date: 1856
Bench: Jervis C.J.; Pollock C.B.; Alderson B.; Cresswell, Crowder and Williams JJ.

Facts

The Cameron’s Coalbrook Steam, Coal and Swansea and Loughor Railway Company was incorporated under company legislation.
Its registered deed of settlement authorised the directors to borrow money on bonds.
However, borrowing was permitted only up to the amount authorised by a resolution of the company in general meeting.
The company issued a bond for £2,000 to the Royal British Bank.
The bond:
bore the company’s seal;
was signed by two directors; and
was authenticated by the secretary.
The bank advanced money relying on the bond.
When the company became insolvent, the bank sought to enforce it.
Turquand, the company’s official manager, argued that the bond was not binding because the necessary shareholder authority had not been properly obtained or did not specify the relevant amount.
The bank could inspect the company’s registered constitution and therefore knew that shareholder approval was required.
However, the resolutions and internal proceedings of the company were not matters the bank could readily verify from public documents.
The dispute concerned how far an outsider must investigate a company’s internal management before relying on an apparently regular corporate act.

Whether the bank was required to prove that the company had properly passed the internal resolution authorising the borrowing.
Whether an outsider may assume that internal corporate procedures have been regularly performed.
Whether the bond was enforceable despite a possible internal irregularity.

Persons dealing with a company are deemed to have notice of its publicly registered memorandum and articles.
However, they are not expected to know the company’s internal proceedings.
Where a transaction:
falls within the company’s corporate powers;
appears to have been executed by proper officers; and
could have been validly authorised through an internal procedure, an outsider acting in good faith may assume that the procedure was followed.
This is the doctrine of indoor management or the Turquand rule.
The rule does not protect a person who:
actually knows of the irregularity;
participates in it;
faces suspicious circumstances requiring inquiry;
relies on a forgery; or
deals with an officer acting plainly outside apparent authority.

The bank was deemed to know from the registered deed that:
the company had power to borrow; and
shareholder authorisation was required.
It was not, however, required to inspect every minute book or verify the precise form of each internal resolution.
The transaction was not ultra vires the company.
Borrowing was within the company’s capacity.
The alleged defect related only to whether the directors had obtained the correct internal approval.
The bond appeared regular on its face:
it carried the company seal;
two directors had signed it; and
the secretary had authenticated it.
These were the officers and formalities an ordinary lender would expect.
Nothing surrounding the transaction put the bank on notice that authority was missing.
Requiring outsiders to investigate all internal procedures would make corporate dealings commercially impractical.
A company is better placed than an outsider to ensure that its own directors and officers comply with internal rules.
Therefore, the risk of undisclosed internal irregularity should ordinarily fall on the company, not on an innocent third party.
The Court distinguished:
knowledge of the constitutional limit; from
knowledge that the company had failed internally to comply with that limit.
Constructive notice applied to the first, while indoor management protected the bank regarding the second.

The Court held that the bond was valid and enforceable against the company.
The bank was entitled to assume that the required resolution had been properly passed.
The case established the indoor-management rule as an important protection for persons dealing with companies in good faith.
Use this case for: an outsider must know public constitutional limits but may ordinarily presume that the company has complied with its internal procedures.