Royal British Bank v. Turquand
The company was held bound by a bond its directors gave to the Royal British Bank, even though the general resolution required by the company's deed of settlement had not been passed. The bank was taken to know the deed, but it was entitled to assume that internal formalities like passing the resolution had been completed. The case gave the doctrine of indoor management its other name, 'the rule in Turquand's case'.
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Facts
The company's deed of settlement served as its constitution. It allowed the directors to borrow on bonds such sums as might be authorised by a general resolution of the company.
The directors gave a bond to the Royal British Bank without such a resolution having been passed.
When the bank sued on the bond, Turquand, the official manager of the company, argued that the bond was not binding because the required resolution had not been passed.
Issues
Was the company bound by a bond given by its directors when the general resolution required by the deed of settlement had not actually been passed?
Was an outsider dealing with the company bound to inquire whether such an internal resolution had been passed?
Arguments
For the company: Turquand, the official manager, argued that the bond was not binding because the general resolution required by the deed of settlement had not been passed.
Judgment
The court held the company liable on the bond.
The bank was taken to know the deed of settlement, so it knew that a resolution was required. But whether the resolution had actually been passed was a matter of internal management, which the bank could not know. The bank was therefore entitled to assume that the resolution had been passed.
Legal principles
Persons dealing with a company are bound to read its public documents, but they are not bound to inquire into its internal proceedings. This is the doctrine of indoor management, also called the rule in Turquand's case.
The doctrine is based on convenience. Business would stop if every person dealing with a company had to examine its minute books.
According to the lecture, the doctrine has exceptions. (1) It does not protect a person who actually knows of the irregularity. (2) It does not protect a person who is put on inquiry by suspicious circumstances and fails to inquire, or who is negligent. (3) It does not protect insiders, such as directors, who are expected to know the internal affairs. (4) It does not apply to forgery, because a forged document is a nullity (Ruben v. Great Fingall Consolidated, where a company was held not bound by a share certificate on which the secretary had forged two directors' signatures). (5) It does not apply where the act is outside the apparent authority of the officer, or is void, for example ultra vires the company.
Relevant provisions
Deed of settlement of the company (its constitution), which allowed borrowing on bonds only as authorised by a general resolution; Doctrine of indoor management (rule in Turquand's case)
Importance
This case is the foundation of the doctrine of indoor management, and the doctrine itself is named after it ('the rule in Turquand's case'). It balances the rule that outsiders must read a company's public documents against the practical need to protect outsiders from hidden internal irregularities.
Students must know the rule together with its exceptions: actual knowledge, suspicious circumstances or negligence, insiders, forgery (Ruben v. Great Fingall Consolidated), and acts outside apparent authority or ultra vires. These are frequently asked in exams.
Easy explanation
A company's rulebook said its directors could borrow money only if the shareholders first passed a resolution approving it. The directors borrowed from the Royal British Bank and gave the bank a bond, but the shareholders had never passed the resolution. Later, the company's official manager, Turquand, said the company did not have to pay because the resolution was missing.
The court said the company must pay. The bank had read, or was expected to read, the rulebook, so it knew a resolution was needed. But the bank had no way of seeing whether the resolution had actually been passed inside the company. That was the company's internal business. So the bank could safely assume everything had been done properly.
In short, an outsider must read a company's public documents, but does not have to check what happens behind its closed doors.
Practical example
Hypothetical: The articles of Zoya Traders Ltd say its directors may take loans only after the shareholders pass a resolution approving them. Prince, a lender, reads the articles and gives a loan on the directors' request. He has no reason to doubt anything. Later the company says the resolution was never passed and refuses to repay. Under the rule in Turquand's case, Prince could assume the internal resolution had been passed, so the company is bound. But if Farhan, a director of the same company, had lent the money, he would not be protected, because insiders are expected to know the internal affairs. Likewise, if Neha, a lender, knew the resolution had not been passed, she would not be protected either.
Key points
- Outsiders must read a company's public documents but need not inquire into its internal proceedings.
- The directors gave a bond without the general resolution required by the deed of settlement; the company was still held liable.
- Whether the resolution was passed was a matter of internal management, so the bank could assume it had been passed.
- The case gives the doctrine of indoor management its other name: the rule in Turquand's case.
- Exceptions: actual knowledge, suspicious circumstances or negligence, insiders, forgery, and acts beyond apparent authority or ultra vires.
- Forgery exception: Ruben v. Great Fingall Consolidated, where the company was not bound by a forged share certificate.
Video explanation
Case explained
Royal British Bank v. Turquand
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