Royal British Bank v. Turquand
A person dealing with a company in good faith may assume that the company's internal procedures and formalities have been duly complied with.
Citation
Royal British Bank v. Turquand
(1856) 6 E&B 327
- Court
- Court of Exchequer Chamber
- Statute
- Company law — doctrine of indoor management
Facts, issue and held
Facts
The company's registered deed of settlement authorised the directors to borrow on bonds such sums as might from time to time be authorised by a resolution passed at a general meeting of the company. The directors issued a bond to the Royal British Bank, but no resolution authorising that borrowing had in fact been validly passed. When the bank sought to enforce the bond, the company's official manager resisted on the ground that the internal requirement had not been satisfied.
Issue
Whether the bank, having notice of the publicly registered deed permitting borrowing subject to a resolution, was bound to verify that the resolution had actually been passed.
Held
The court held in favour of the bank. Having read the registered deed and found that borrowing was permitted subject to the passing of a resolution, the bank was entitled to assume that the resolution had been duly passed. It was not required to enquire into the company's internal proceedings, which were not open to its inspection.
- Documents on the public register are deemed known to those dealing with the company — the doctrine of constructive notice.
- Internal proceedings such as the passing of resolutions are not on the public register and cannot be verified by an outsider.
- It would make commercial dealing with companies impracticable if every outsider had to prove the company's internal compliance.
- The rule protects the outsider and places the risk of internal irregularity on the company, which is best placed to control it.
Ratio decidendi
Ratio decidendi
An outsider dealing with a company in good faith is entitled to presume that acts of internal management have been regularly performed, and is not affected by irregularities in the company's internal proceedings.
Why it matters
Turquand's rule is the necessary counterweight to constructive notice. Without it, the public registration of a company's constitution would make ordinary commercial dealing with companies unworkable.
Current standing
The rule is subject to well-established exceptions and does not protect a person who has actual knowledge of the irregularity, who is put on enquiry by suspicious circumstances, who has not in fact read the public documents where the transaction is on its face outside the company's powers, where the act is forged, or where the person is an insider such as a director.
Using it in an answer
Under the doctrine of indoor management laid down in Royal British Bank v. Turquand (1856) 6 E&B 327, a person dealing with a company in good faith is entitled to assume that the company's internal procedures have been duly complied with.
In the present case the public documents permitted the transaction subject to an internal authorisation, and the outsider had no notice that the authorisation was absent.
The outsider is accordingly protected, and the company is bound by the transaction. The position would differ if the outsider had actual knowledge of the irregularity or had been put on enquiry, in which case the exceptions to Turquand's rule would apply.
In the exam
Almost always examined as a practical problem in which you must first apply constructive notice to the registered documents and then apply indoor management to the internal procedure. The marks sit in identifying whether any exception applies.
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Talk to usHow do constructive notice and indoor management fit together?
Constructive notice deems an outsider to know what is on the public register — the memorandum and articles. Indoor management then says the outsider need not go further and verify what happens inside the company. The first fixes the outsider with knowledge of the rules; the second excuses him from checking compliance with them.
When does Turquand's rule not protect an outsider?
Where the outsider knows of the irregularity, where the circumstances are suspicious and put him on enquiry, where the transaction is on its face beyond the company's powers as disclosed by the public documents, where the document is a forgery, or where the person is an insider such as a director who is expected to know the true position.
Please note
These summaries are prepared for CA exam preparation and are not legal advice. Case law develops — a decision may be distinguished, read down or superseded by later judgments or by legislative amendment. Verify the current position against ICAI's study material for your attempt and against the reported judgment before relying on any principle stated here.
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