Company’s Indoor Affairs Are The Company’s Problems – The Rule of Indoor Management by The Court of Exchequer
In the case of Royal British Bank v Turquand (1856) 6 E&B 327, popularly known as The Turquand’s case by Sir John Jervis CJ of the Court of Exchequer Chamber held that people transacting with companies are entitled to assume that internal company rules are complied with, even if they are not.
FACTS OF THE CASE:
The directors of Royal British Bank Ltd. (R.B.B) issued a bond to Turquand and borrowed money from him. The Articles of Association authorized the directors to issue such bonds with the approval of a proper resolution. The directors were empowered by the Articles to borrow on bonds only such sums of money as the company in a general meeting resolves to borrow from time to time (through the passing of necessary resolution). However, no such resolution was passed for authorizing the issue of bonds. And the directors issued a bond to Turquand without the authority of a necessary resolution. Later, the repayment of the loan defaulted and the company was questioned to be liable. The claim was refused by the shareholders in the absence of the resolution.
JUDGEMENT:
It was determined that Turquand could sue on the bonds since he was entitled to presume that the resolution had been legally passed. It was noted that an ordinary person dealing with a company is entitled to assume that the necessary compliance or delegation of powers to the officers dealing on behalf of the company has been made. He does not need to inquire beyond what is apparent and obvious from the situation. In other words, an outsider is entitled to assume that, in relation to a contract entered into with him, all of the essential formalities to be carried out under the Articles or Memorandum have been duly carried out. In this context, the principle of Indoor Management “Outsiders are bound to know the external position of the company, but are not bound to know its indoor management” was drawn.
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Reviewed by Anagha K Bharadwaj