Corporate Law Case Brief – Royal British Bank v. Turquand

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1) BACKGROUND:

– Doctrine of Constructive notice

  • The Memorandum of Association of a Company has to be lodged with the Registrar of Companies.
  • This is available for public inspection, people doing business with the Company are free to inspect the document to see if there is any limitation of powers or limitations placed on the nature of the business.
  • This created a problem- outsiders are deemed to know any limitation placed on the Directors of the Company.
  • Therefore if later, it was found that there was some irregularity within the Company in respect of any decisions, outsiders dealing with the Company are deemed to be aware of it.

2) FACTS:

  • Turquand was the official manager (liquidator) of the insolvent ‘Cameron’s Coalbrook Steam, Coal, and Swansea and London Railway Company’. It was incorporated under the Joint Stock Companies Act 1844.
  • The company had given a bond for £2000 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.
  • The company alleged that under its registered deed of settlement (the articles of association), directors only had power to borrow what had been authorised by a company resolution.
  • A resolution had been passed but not specifying how much the directors could borrow.

The Company claimed that there was no resolution passed authorising the issue of the bond and that therefore the Company was not liable

3) HELD:

The Court held that the Company was entitled to sue on the bond. As the requirement for the resolution was a matter of internal regulation for the Company and the Bank could not know whether such resolution had in fact been passed, it was entitled to presume that the resolution had indeed been passed.

The rule is also known as the Indoor Management rule.

4) TURQUAND RULE OR THE INDOOR MANAGEMENT RULE:

The rule in Turquand’s case is a presumption of regularity. In other words, a person dealing with the Company is entitled to presume that all the internal procedures of the Company have been complied with. This is a practical approach to solving problems facing outsiders because an outsider would have difficulty to discover what is going on in the Company.

To summarize the above points-

  1. If an officer of the Company has exceeded his authority as given to him by the Articles of Association.
  2. There has been some non-compliance with an internal procedure
  3. The outsider may presume that the internal procedure had been complied with.

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