Royal British Bank v Turquand

Facts

The company's deed of settlement (registered, and so notice to the public) empowered the directors to borrow on bond such sums as were authorised by a resolution of the general meeting. The directors gave a bond to the bank without a duly passed resolution actually authorising the specific borrowing. The bank sued on the bond and the company resisted on the ground that no proper resolution existed.

Issues

• Was the company bound by a bond given by its directors where the required internal authorising resolution had not been duly passed?
• Must an outsider, having constructive notice of the registered deed, also verify that internal procedural requirements were actually fulfilled?

Arguments

The company argued that the registered deed put the bank on notice that borrowing needed a resolution, which was absent, so the bond was unauthorised. The bank argued that, having seen the deed authorised borrowing on resolution, it was entitled to assume the necessary resolution had in fact been passed as an internal matter.

Held

The Exchequer Chamber held the company liable on the bond. While persons dealing with the company are deemed to have read the public/registered documents (constructive notice), they are not bound to inquire into the company's indoor proceedings. The deed allowed borrowing on resolution; the bank could presume that a resolution had been duly passed, since whether it had been was a matter of internal management which an outsider could not verify. The company was therefore bound.

Ratio decidendi

Persons dealing in good faith with a company are entitled to assume that acts within its constitution and powers have been regularly and duly performed as to internal procedure (the rule of indoor management / Turquand rule).

Significance

The fountainhead of the doctrine of indoor management, the necessary counterweight to constructive notice. Universally applied, including across Indian High Courts, and qualified only by recognised exceptions (knowledge of irregularity, suspicion of irregularity, forgery, no knowledge of the constitution, and acts ultra vires the company).

Related