Turquand’s rule also known as the indoor management rule originates from this case.
Facts of the Case
The plaintiff (the Royal British Bank) sued the defendant (Turquand, the liquidator of an insolvent company, Cameron's Coalbrook Steam, Coal and Swansea and Loughor Railway Company) for repayment of a bond issued by the company before becoming insolvent. It was alleged that the company had on 6th March 1850 issued a bond for 2000 pounds to the plaintiff for securing the company's drawings on its current account. The bond was signed by two directors and the secretary with the company’s seal affixed.
When the company was sued for default on repayment of the bond, the company claimed that the bond was issued without the proper authority of the shareholders. Therefore, the company does not recognise the bond and thus deemed itself not liable to repay the bond. The Court of Queen’s Bench allowed the plaintiff’s claim. The defendant appealed.
Issue of the Case
Whether the company is liable to the repayment of the bond?
Judgment of the Case
Based on the facts, the clauses of the company’s registered deed of settlement appeared that the directors were authorised to give bills, notes, bonds or mortgage and the directors might borrow on bond of a sum authorised by the company through a general resolution from time to time. When the appellant claimed for repayment of the bond, the company claimed that there is no such resolution passed to issue the bond. Therefore, the bond was given without the authority or consent of the shareholders of the company.
The facts show that there was indeed a resolution passed authorising the directors to borrow on bond “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 the Act of Parliament” but it did not define the amount to be borrowed.
The Court held that when dealing with companies, the parties dealing with them are bound to read the statute and the deed of settlement but they are not bound to do more. The appellant in this case after reading the deed of settlement would find that the company is permitted to issue bonds on certain conditions. After knowing that a resolution had been passed, the appellant would have the right to assume that the conditions had been satisfied by the company and thus the bond is valid.
Principle of the Case
When an outsider deals with a company, he has the duty to ensure that the transaction was within the powers of the company’s Articles and the company’s public documents. He is not required to enquire about the validity of internal proceedings of the company. He can assume that the company’s internal requirements and procedures have been complied by their management. This is known as Turquand’s rule or the indoor management rule.
The full case can be access at the link here.
Read also:
Pekan Nenas Industries Sdn Bhd v Chang Ching Chuen & [1998] 1 CLJ 793; [1998] 1 MLJ 465
Kang Hai Holdings Sdn Bhd & Anor v Lee Lai Ban [2018] 2 CLJ 550; [2018] 2 MLJ 574