Royal British Bank v Turquand
Encyclopedia
Royal British Bank v Turquand (1856) 6 E&B 327 is a UK company law case that held people transacting with companies are entitled to assume that internal company rules are complied with, even if they are not. This "indoor management rule" or the "Rule in Turquand's Case" is applicable in most of the common law world. It originally mitigated the harshness of the constructive notice
Constructive notice
Constructive notice also known as the Doctrine of Constructive Notice is a legal fiction used in the law of both common law and civil law systems to signify that a person or entity is legally presumed to have knowledge of something, even if they have no actual knowledge of it.-Intellectual...

 doctrine, and in the UK it is now supplemented by the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...

 sections 39-41.

Facts

Mr 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
Joint Stock Companies Act 1844
The Joint Stock Companies Act 1844 was an Act of the Parliament of the United Kingdom that expanded access to the incorporation of joint-stock companies....

. The company had given a bond for £2000 to the Royal British Bank
Royal British Bank
The Royal British Bank was a British joint-stock bank, established under a Royal Charter in 1849, that collapsed in 1856, causing a scandal.In 1858 the eight directors — not including the bank's founder, John MacGregor, Member of Parliament for Glasgow, who had left the bank in 1854 and died in...

, 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 what had been authorised by a company resolution. A resolution had been passed but not specifying how much the directors could borrow.

Judgment

Sir John Jervis
John Jervis (politician)
Sir John Jervis was an English lawyer, law reformer and Attorney General in the administration of Lord John Russell...

 CJ, for the Court of Exchequer Chamber affirmed the Queen’s Bench and said that it was valid, so the Royal British Bank could enforce the terms of the bond. 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 in Companies House, so there was constructive notice
Constructive notice
Constructive notice also known as the Doctrine of Constructive Notice is a legal fiction used in the law of both common law and civil law systems to signify that a person or entity is legally presumed to have knowledge of something, even if they have no actual knowledge of it.-Intellectual...

. But the bank could not be deemed to know about 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. Jervis CJ gave the judgment of the Court.
Pollock CB, Alderson B, Cresswell J, Crowder J and Bramwell B concurred.

Significance

The rule in Turquand's case was not accepted as being firmly entrenched in law until it was endorsed by the House of Lords
Judicial functions of the House of Lords
The House of Lords, in addition to having a legislative function, historically also had a judicial function. It functioned as a court of first instance for the trials of peers, for impeachment cases, and as a court of last resort within the United Kingdom. In the latter case the House's...

. In Mahony v East Holyford Mining Co Lord Hatherly phrased the law thus:
So, in Mahoney, where the company's articles provided that cheque
Cheque
A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...

s should be signed by any two of the three named directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...

 and by the secretary, the fact that the directors who had signed the cheques had never been properly appointed was held to be a matter of internal management, and the third parties who received those cheques were entitled to presume that the directors had been properly appointed, and cash the cheques.

The position in English law is now superseded by section 40 of the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...

, but the Rule in Turquand's Case is still applied throughout many common law jurisdictions in the Commonwealth
Commonwealth of Nations
The Commonwealth of Nations, normally referred to as the Commonwealth and formerly known as the British Commonwealth, is an intergovernmental organisation of fifty-four independent member states...

. According to the Turquand rule, each outsider contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

ing with a company in good faith
Good faith
In philosophy, the concept of Good faith—Latin bona fides “good faith”, bona fide “in good faith”—denotes sincere, honest intention or belief, regardless of the outcome of an action; the opposed concepts are bad faith, mala fides and perfidy...

 is entitled to assume that the internal requirements and procedures have been complied with. The company will consequently be bound by the contract even if the internal requirements and procedures have not been complied with. The exceptions here are: if the outsider was aware of the fact that the internal requirements and procedures have not been complied with (acted in bad faith); or if the circumstances under which the contract was concluded on behalf of the company were suspicious.

However, it is sometimes possible for an outsider to ascertain whether an internal requirement or procedure has been complied with. If it is possible to ascertain this fact from the company's public documents, the doctrine of disclosure and the doctrine of constructive notice will apply and not the Turquand rule. The Turquand rule was formulated to keep an outsider's duty to inquire into the affairs of a company within reasonable bounds, but if the compliance or noncompliance with an internal requirement can be ascertained from the company's public documents, the doctrine of disclosure and the doctrine of constructive notice will apply. If it is an internal requirement that a certain act should be approved by special resolution, the Turquand rule will therefore not apply in relation to that specific act, since a special resolution is registered with Companies House
Companies House
Companies House is the United Kingdom Registrar of Companies and is an Executive Agency of the United Kingdom Government Department for Business, Innovation and Skills . All forms of companies are incorporated and registered with Companies House and file specific details as required by the...

 (in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

), and is deemed to be public information.
The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
x
OK