Royal British Bank v Turquand

Content sourced from Wikipedia, licensed under CC BY-SA 3.0.

Royal British Bank v Turquand (1856) – the indoor management rule

What the case established
- The Rule in Turquand’s Case says that people dealing with a company in good faith can assume the company has followed its own internal rules. They don’t have to check every internal document.
- This helps avoid unfair results if a company’s internal procedures were not followed perfectly.

The facts in simple terms
- A bankrupt railway company gave a bond for £2,000 to the Royal British Bank. The bond was signed under the company’s seal by two directors and the secretary.
- The company’s deeds said directors could borrow only up to amounts authorized by a general meeting resolution. A general resolution existed but it did not specify an exact borrowing limit.
- The bank was sued when the company failed to pay. The bank argued it could rely on the directors’ apparent authority, even if the internal rules weren’t fully followed.

What the court decided
- Lord Chief Justice Jervis, for the court, held the bond was valid. The bank could enforce it.
- The bank was presumed to know that directors could borrow only up to what a general meeting resolution allowed. But the bank wasn’t required to investigate every internal detail or determine which ordinary resolutions had been passed.
- Although the company’s articles were registered (giving constructive notice), ordinary resolutions weren’t registrable, so the bank could not be expected to know their exact contents.

Why this matters
- The indoor management rule protects outsiders who deal with a company in good faith, letting them rely on the appearance of proper authority.
- It does not blindside a party who knows internal irregularities or acts in bad faith, or whose circumstances are suspicious.

How the rule has developed
- The rule was reinforced in later cases, such as Mahony v East Holyford Mining Co, which also held that outsiders should not be unfairly bound by internal missteps if dealings align with the company’s articles.
- Today, the England and Wales rule is supplemented by the Companies Act 2006, particularly sections 39–41, but the underlying idea remains influential in many common law jurisdictions.

Key exceptions and limits
- If the outsider knows internal rules were not followed, or the circumstances are suspicious, the rule may not apply.
- If it’s possible to determine whether internal requirements were met from the company’s public documents, the doctrines of disclosure and constructive notice apply instead of Turquand’s rule.
- For acts that require a special resolution (and which is publicly filed), the Turquand rule may not apply to that specific act.