Chapter"2:"Doctrine"of"Indoor"Management:"The"Turquand"Rule"

Chapter"2.1:"Inception"of"the"Doctrine"
In the famous case of Royal British Bank v. Turquand,21 the court set forth a proposition of
law
that later came to be called the Doctrine of Indoor Management. The doctrine states that if a
person in good faith deals with the board of directors or any other representative body of a
company which is in fact exercising the power of management and direction of its business
and
affairs, that person is not affected by defects of procedure within the company or by its
failure to
fulfill conditions which are required by the companies memorandum or articles to be fulfilled
before the act or transaction in question is affected.22
While many authors have argued that the rule is an exception to the rule of Constructive
notice,
some also feel that the doctrine serves a much wider role at a greater level. If we look at the
two
doctrines with respect to the point of time when the doctrine of indoor management comes
into
operation, we will notice that this doctrine does not really act so much as an exception to the
rule
of constructive notice but as a limiting factor to its ambit. Essentially, under the doctrine of
constructive notice, while the third person was bound to take notice of the provisions of a
company’s Memorandum and Articles, and thus identify any restrictions in the same, he/she
is
not bound to inquire any further. He could take it for granted that the agent has been duly
appointed.23
This rule has been in place for two reasons. Firstly, to limit the burden of inquiry placed on
the
shoulders of the third party entering into a transaction with the company and, secondly, the
third
party may not have the means to ascertain whether the inner formalities of the company are
carried out properly or not.24
Thus, the application of the Turquand rule, or the doctrine of indoor management, is
restricted to
people unaware of any irregularity in the authority of the agent with whom they are
contracting.
If the circumstances so suggest, the rule would also protect any member or directors of the
21 [1855] 5 E&B 248.
22 Robert R. Pennington, COMPANY LAW, 130 (8th edn., 2001)
23 Mahoney v East Holyford Mining Co. [1875] LR 7 HL 869 (House of Lords): here
Hatherly L.J. held that
while the third party is required to know the mode of appointment and the duties of the
Directors, beyond
that the where there are person conducting the affairs of the company in a manner that seems
perfectly
consonant with the articles of association, then those dealing with them, externally are not to
be affected by
any irregularities which may take place in the internal management of the company.
24 Supra note 16 at 218.
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company due to their ignorance with regards to that particular transaction that they seek to
enforce.25 Conversely, any outsider who has true knowledge of the affairs of the company or
is
put on inquiry would not be protected by this rule.26
Some questions that arise in relation to the Doctrine of Indoor Management are mostly with
respect to its ambit as we shall notice in the next sub-chapter.
Chapter"2.2:"Indoor"management"and"the"Laws"of"Agency:"What"should"apply?"
Firstly, it must be made clear that the doctrine of indoor management doesn’t apply to forged
documents as has been made clear in the Ruben case27 wherein it was clearly held that a
forged
document is a pure nullity. However, given the wide ambit of such a ban, there are exceptions
to
it, such as when an agent of the company, with actual or ostensible authority, represents the
document to be genuine. Even in cases where the agent may represent his own authority to be
genuine, such “forgeries” will not amount to nullity as such but general principles of
company
law would apply.28 Even in the Kreditbank case29 forged documents were held to be null
and
void.
Now looking at the rule of indoor management at a wider angle, one would see it as a
protection
for the third party against improper appointment and thus defective authority of the agent but
it
would still assume that there has to be at least an ostensible authority with the agent for the
doctrine to apply.3031 However, there might be cases when the agent’s authority itself is
question, that is to say that it is alleged there is no authority at all but a sweeping application
of
the Turquand rule would bind the company to any transaction entered into by any of its
agents
25 See Helly-Hutchinson, [1968] 1 QB 549; Howard v. Patent Ivory Manufacturing Co.,
[1888] 38 ChD
156.
26 B. Liggett (Liverpool) Ltd. v. Barclays bank ltd., [1928] 1 KB 48; Howard v. Patent Ivory
Manufacturing
Co., [1888] 38 ChD 156: here,It has been held that where the third party can be assumed to
have notice of
the internal irregularity or could have noticed the irregularity through ordinary care and
caution, the rule of
indoor management would not protect the third party.
27 Ruben v. Great Fingall Consolidated, [1906] AC 439 (House of Lords)
28 Supra Note 16 at p. 227.
29 Kreditbank Cassel GmbH v. Schenkers ltd., [1927] 1 KB 826 (Court of Appeal).
30 Morris v. Kanssen, [1946] A.C. 459
31 Vincent Powell-Smith, THE LAW AND PRACTICE RELATING TO COMPANY
DIRECTORS, 119 (1969). This
rule basically means to say that where articles give full power to the board to delegate its
functions to a
director or any other officer of the company, then it follows that any outsider is entitled to
assume, unless he
has knowledge to the contrary, that such power has been delegated to such an agent of the
company who
purports to exercise it
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who could have been empowered by the company to do so and thus create an unnecessary
risk
for the company.32
Such was indeed the case in the early years of its inception as the indoor management rule
was
applied liberally and it was held that if there is de facto exercise of power by a person then he
may be thought to be represented as occupying a position that would allow such exercise of
power. It would benefit now to retrospectively analyze the application of indoor management
rule with respect to the principles of agency In Biggerstaff’s case33 the director in question
discharged the functions of the managing director and the articles provided for the
appointment
of a managing director but there was a lack of evidence as to whether the director in question
was appointed to the position. The court, referring to Lindley34 held that so long as there was
a
power to appoint and the third party has no notice of any irregularity in the appointment, the
company is bound by the acts of the agent within the usual course of his authority.
Thus, in such cases it is not enough for the court to rely on the rule of indoor management
only.
In fact, in the Kreditbank case35 the English court finally restricted the ambit of indoor
management by stating that not just anyone who could have been delegated the authority to
enter
into a transaction on behalf of the company may be allowed to do so.36 This judgment by
questioning the principal of agency in the doctrine of indoor management seems to usher in
the
general principals of agency into company law.
Thus, we come to a second kind of situation where the agent exceeds his/her authority.
Unlike
indoor management rule, there is no defective bestowal of authority, but a lack of authority
altogether.
Since, now the question was whether the agent who purports to bind the company with his
deeds
has the authority to do so or not, questions of actual and ostensible authority came into the
purview of this research paper. The court also increasingly came to rely on the “holding out”
32 Supra note 12, See Campbell at 115.
33 Biggerstaff v. Rowatt’s Wharf ltd., [1896] 2 ChD 93 (Court of Appeal)
34 Lindley on Companies, 159 (5th Edn.)
35 Kreditbank Cassel GmbH v. Schenkers ltd., [1927] 1 KB 826 (Court of Appeal).
36 The Court Felt that the doctrine if allowed to applicability unbridled, then the logical
conclusion of such a
doctrine would be extremely alarming… “Anyone who has the pen of a ready writer need
only sit down and
write a bill of exchange in the name of a company having an article in this form, and the
company would
presumably be bound when the bill got into the hands of a holder for value without notice.” It
was further
held that there needs to be evidence for authority to exist with the agent who has bound the
company in the
given transaction.
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principal, where the principal makes a representation of the agent having the requisite
authority,
which was already discussed in the preceding chapters under the doctrine of apparent
authority.
As already discussed, the principal may make a representation giving authority to the Third
Party in two ways: firstly, by making an express or implied representation to the third party
of
granting an authority to the agent to act in a particular transaction and, secondly, by giving
the
agent a position with which certain powers are usually associated.37 The usual authority that
follows the position of the contracting agent is an important factor and was used to bind the
company in the First Energy Case38 in conjunction with a representation by the agent himself
to
that effect.
In cases where it is alleged that there is no authority with the agent, the company may be
estopped from denying authority to its agent if it has resorted to any of the two alternatives
but
the rule has been applied strictly to determine as to when a person can rely on the ostensible
authority of the agent of a company. In the case of Rama Corporation.39, there was some
clarity
given to the plethora of seemingly conflicting decisions on the exact limitation on the indoor
notification rule. The court crystallized the principal to mean that the exact ingredients to
construe apparent or ostensible authority of the agent by the third party should be De facto
exercise of power and a representation of actual authority though such representation may be
express or implied. Also, this principle reconciles with the Turquand rule favorably as the
question that the rule essentially deals with is that of De Jure execise of power. The Doctrine
of
Indoor Notification was also further limited in Houghton and Co.40 case through the
judgment of
Bankes L.J., who held that the unusual nature of the transaction should put the third party on
inquiry about the real authority of the transacting party an thus render the rule inapplicable in
this sense.
37 Egyptian International Foreign trade Co. v. Soplex Wholesale supplies Ltd., The Raffaella
[1985] BCLC
404 at 411; When a person is appointed to a post within the company, in third party’s view,
he is deemed to
be vested with all the powers vested ordinarily in an individual occupying that post. Some of
these powers
are statutorily accorded and some are accorded through the memorandum or the articles.
However, it must
be noted that in common law the managing director’s authority has a wide scope due to the
modern trend of
the articles allowing the board to delegate a plethora of powers to the managing director. An
ordinary
director’s power is considerably lesser in this respect as he might, at the most be granted the
power to
validate the instruments of daily working of the company, and that too after such instrument’s
ratification
by the managing director.
38 First Energy (UK) Ltd. v. Hungarian International Bank Ltd., [1993] BCLC 1409 (Court
of Appeal)
39 Rama Corporation LD. v Proved Tin and General Investments LD, [1952] 2 QB 147.
40 Houghton & Co. v. Northard Lowe & Wills Ltd., [1927] 1 KB 246.
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However, the Final clarification was offered only in the Freeman and Lockyer case41
wherein it
was held that in British Thomson Houston Co. case42 as well as the Mahony case43, where
the
third party’s claim was allowed, the contract was actually hit by the provisions of the Articles
and the Memorandum of association of the companies, but, more importantly, the persons
making the claim of authority were people who, in the ordinary circumstances, would seem to
be
possessed of such authority by an outsider who is not familiar with the articles of the
company.
However, if the persons were not so, then the contractor [third party] would not be able to
claim
that they relied on the representation made unless they were proved to be familiar with the
articles of the company, in keeping with the rule of law set by Bankes L.J. in Houghton &
Co.
case.44 This point is further elaborated in the next sub-chapter.
Moving on to cases where the claim of the third party failed,45 the court held that these were
cases where the transactions were of an unusual nature and the assumption of authority by an
outsider will not be easy to make.46 In none of the case could the contractors have claimed
that
the agent was acting in the course of the usual authority that a person in his/her position is
expected to possess. Thus, the contractor could not have relied on the usual authority
argument
to allege representation by the company.47 He/she would have to rely on the relevant
provisions
of the articles of association, if any. It is in this respect that the next sub-chapter becomes
relevant.

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