Facts of the case:
Mr. Turquand served as the official manager (liquidator) for the insolvent Cameron’s Coalbrook Steam, Coal, and Swansea and Loughor Railway Company, which was incorporated under the Joint Stock Companies Act 1844. The company had issued a £2,000 bond to the Royal British Bank, securing the company’s current account drawings. This bond bore the company’s seal and was signed by two directors and the secretary. When the company was sued, it contended that according to its registered deed of settlement (articles of association), the directors could only borrow funds up to an amount authorized by a company resolution. While a resolution had been passed, it did not specify the borrowing limit for the directors.
Judgement:
Chief Justice Sir John Jervis, representing the Court of Exchequer Chamber, ruled that the bond was valid and that the Royal British Bank could enforce its terms. He stated that while the bank should be aware that the directors could borrow only within the limits of authorized resolutions, it was not required to know the specific ordinary resolutions passed, as these were not registered. This established the “indoor management rule,” which stipulates that internal company affairs are the company’s concern. Jervis CJ’s judgment affirmed the Court of Queen’s Bench’s decision.
He suggested that the resolution presented in the replication likely satisfied the requirements of the deed of settlement. The deed permitted directors to borrow money through bonds as authorized by a general company resolution. The replication demonstrated a resolution allowing directors to borrow sums for specified periods and at interest rates they deemed appropriate, aligning with the deed and Parliament’s Act, without defining the borrowing amount. This sufficed for the bond’s validity.
The plea did not raise valid objections against the company’s borrowing. Dealings with such companies differ from other partnerships, requiring parties to read relevant statutes and deeds of settlement. However, they need not do more. If they read the deed and found it permitted borrowing under certain conditions, they could infer that proper authorization existed.
Judges Pollock CB, Alderson B, Cresswell J, Crowder J, and Bramwell B concurred with this judgment.
Significance of the case:
The rule in Turquand’s case wasn’t firmly established in law until the House of Lords endorsed it. In Mahony v East Holyford Mining Co, Lord Hatherly clarified that when individuals conduct a company’s affairs in accordance with its articles of association, external parties dealing with them are not affected by internal management irregularities.
In Mahony, even though the signing directors were improperly appointed, third parties receiving cheques could presume proper appointment and cash the cheques. Although English law is now governed by section 40 of the Companies Act 2006, the Rule in Turquand’s Case remains relevant in many Commonwealth jurisdictions.
The Turquand rule states that an outsider dealing with a company in good faith can assume that internal requirements and procedures have been complied with, binding the company to the contract even if they haven’t been followed. Exceptions include if the outsider knew of non-compliance (bad faith) or if the contract circumstances were suspicious.
However, if internal compliance can be verified from the company’s public documents, the doctrines of disclosure and constructive notice apply instead. The rule keeps an outsider’s duty to investigate a company’s internal affairs within reasonable bounds. But, if an internal requirement like a special resolution can be confirmed through public documents (such as those registered with Companies House in the UK), the Turquand rule does not apply.
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