The Rule in Turquands Case free essay sample

The doctrine of Indoor management, popularly known as the Turquands rule initially arose some 150 years ago in the context of the doctrine of constructive notice. The doctrine of constructive notice of a companys public documents was, of course, abolished prospectively. The rule was partly dictated by practical necessity persons contracting with a company were not expected to spend their time checking that any required resolutions had properly been passed, at meetings that had been correctly convened, by directors whose appointments had been duly made. The rule in Turquands Case can operate in relation to any contractual obligation but has over the years frequently been raised in respect of a document to which the companys seal has been affixed. Professor Gower, summarizing the common law position in 1969, stated: [Where] the third party receives a document sealed in the presence of the appropriate individuals as stated in the articles of association, he is entitled to rely on its formal validity. We will write a custom essay sample on The Rule in Turquands Case or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Even if the board have never resolved that the document be sealed, he will be protected for he is not entitled to see the minutes of the board meeting which relate to a matter of indoor management and has no means of checking whether the internal regulations have been complied with [1] . In India, under the Indian Companies Act 1956, the rule has been recognized under s-290 and impliedly under s-81. The principle of indoor management is one of justice, equity and good conscience and has emerged out of the concept of Agency. The Indian Courts have been applying the Doctrine quite frequently and modifying according to the case in hand. The Paper seeks to answer how far the Turquand Rule has been instrumental in protecting the interests of outsiders transacting bona fide with a company. An endeavor has also been made to find out the application of the rule and its ramifications in the modern context. Indoor management: An antithesis to Constructive Notice principle The company is an artificial legal person. Its objects and powers are set out in the memorandum and articles of association as amended from time to time. The memorandum and articles, when registered, become public documents and can be inspected by any member of the public at the office of the RoC under Sec. 610 of the Companies Act on payment of a nominal fee. Thus, every person who contemplates entering into a contract with a company, has the means of ascertaining and consequently presumed to know, not only the exact powers of the company but also to the extent to which these powers have been delegated to the directors and of any limitation placed upon the exercise of these powers. Every person dealing with the company is deemed to have a constructive notice of the contents of its memorandum and AoA. Hence, if a person enters into a contract which is beyond the powers of the company, as defined in the memorandum, he cannot acquire any rights under the contract against the company. This rule proved to be too inconvenient for business transactions and hindered the smooth flow of business. The rigours of the rule was, therefore, alleviated by the judicial pronouncement in Royal British Bank v Turquand, and the doctrine of `indoor management serving as a partial exception to the doctrine of `constructive notice. While the doctrine of constructive notice seeks to protect the company against the outsiders, the principal of indoor management operates to protect the outsiders while dealing with the company. According to this doctrine, as laid down in the Royal British Bank case, persons dealing with a company are not bound to inquire into the regularity of any internal proceedings. In other words, while persons contract with a company they are entitled to assume that the provisions of the Articles have been observed by the officers of the company. It is no part of the duty of an outsider to see that the company carries out its own internal regulations. It is sufficient if the act is not ultra vires. The doctrine of constructive notice operates against the person who has failed to inquire. But the doctrine of indoor management can be invoked by the person dealing with the company and cannot be invoked by the company. The case of Royal British Bank v Turquand The case marks the very origin of the concept of the doctrine of Indoor management. In this case the Directors of the Company were authorized by the articles to borrow on bonds such sums of money as should from time to time by a special resolution of the Company in a general meeting, be authorized to be borrowed. A bond under the seal of the company, signed by two directors and the secretary was given by the Directors to the plaintiff to secure the drawings on current account without the authority of any such resolution. Then Turquand sought to bind the Company on the basis of that bond. Thus the question arose whether the company was liable on that bond. The Court of Exchequer Chamber overruled all objections and held that the bond was binding on the company as Turquand was entitled to assume that the resolution of the Company in general meeting had been passed. The relevant portion of the judgment of Jervis C. J. reads: The deed allows the directors to borrow on bond such sum or sums of money as shall from time to time, by a resolution passed at a general meeting of the company, be authorized to be borrowed : and the replication shows a resolution passed at a general meeting, authorizing the directors to borrow on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlement and Act of Parliament; but the resolution does not define the amount to be borrowed. That seems to me enough We may now take for granted that the dealings with these companies are not like dealings with other partnerships, and the parties dealing with them are bound to read the statute and the deed of settlement. But they are not bound to do more. And the party here on reading the deed of settlement, would find, not a prohibition from borrowing but a permission to do so on certain conditions. Finding that the authority might be made complete by a resolution, he would have a right to infer the fact of a resolution authorizing that which on the face of the document appear to be legitimately done. (emphasis supplied) The Rule in Turquands case The case of Royal British Bank v Turquand [2] , refined the basic Common law of Agency to articulate the Doctrine of Indoor Management. The rule was enunciated by the Court to mitigate the rigors of the Constructive Notice Doctrine. Its importance arises in situations in which the third partys dealings are with some officer or agent other than the Board. The rule protects the interest of the third party who transacts with the Company in good faith and to whom the Company is indebted. The rule enunciated in the decision is often referred to as Turquands rule and indoor management rule. The gist of the rule is that persons dealing with limited liability companies are not bound to enquire into their indoor management and will not be affected by irregularities of which they had no notice The rule enunciated in Turquand has been applied in many cases subsequently and generally in order to protect the interests of the party transacting with the Directors of the Company. Applying the rule, now it can not be argued that a person having dealings with a Company is deemed to have notice of who the true Directors are, and this being shown by public documents i. e. he registers of the directors required to be maintained by the Company and the and the notices of changes. To put it precisely, where an agent was acting apparently consistently with the Companys constitution, the third party was not affected by any internal irregularity. For instance, the lack of disclosure of a Directors interest in the Board as required by the articles, sine he could not discover whether such dis closure had or had not been made [3] . Third parties did not have notice of matters not on register. Only actual notice of the irregularity would affect him.