turquand rule of the companies act, Summaries of Commercial Law

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AN ANLAYSIS OF TURQUAND RULE

MAHI SOLANKI

2020BBL

BBA LLB SECTION – 3

SUBMITTED TO: PROFESSOR UMMUL WARRAH

SCHOOL OF LAW, PRESIDENCY UNIVERSITY

BANGLORE

DECEMBER, 2022

TABLE OF CONTENTS:

INTRODUCTION

RESEARCH QUESTIONS:

 What is Turquand rule?  How does it protect third parties from companies. OBJECTIVES OF THE STUDY: The objective of this is developing a better understanding about the concept of indoor management and how it was developed. This study will also help us understand how this doctrine helps protect the third parties or outsiders from company SCOPE OF THE STUDY: This study focuses on the concept of indoor management or turquand rule and the development of the same. RESEARCH METHODOLOGY:  RESEARCH DESIGN: The following study is done in a descriptive and analytical way, so as to provide clarity with each topic mentioned and discussed.  SOURCES OF DATA: The study was done with the help of secondary sources. The collection of data will be from published papers, relevant articles. Legislations, internet sources, secondary sources were referred to. Various texts were also used. CHAPTER 1: MEANING OF INDOOR MANAGEMENT OR “TURQUAND RULE” CHAPTER 2 CONCLUSION

CHAPTER :

MEANING OF INDOOR MANAGEMENT

As per the Doctrine of Indoor Management if a person, who has satisfied himself that a proposed dealing is not in the nature inconsistent with the Memorandum and Articles of Association of the company is not bound to make a further enquiries and is entitled to assume that all the due internal procedures to render the transaction binding on the company have been followed. This Doctrine is also termed as 'Turquand Rule' and was enunciated in the famous and leading case of Royal British Bank v Turquand in 1856. It provides a shelter and protection to the outsiders dealing with the company that are, in no way, bound to judge the regularity of the internal procedures of a company. The doctrine of indoor management may be summarized as: "While a person dealing with a company is presumed to have read the public documents and understood their contents and made sure that the transactions are not inconsistent therewith, he is also entitled to assume that the provisions of the Articles have been observed by the officers of the company. It is no part of the duty of an outsider to see that company has carried out its indoor internal proceedings (or indoor management)”. This doctrine highlights the idea that an outsider who acts in good faith and enters into a transaction with a firm can have a presumption that there are no internal irregularities and that the company has complied with all procedural requirements. The Doctrine of Indoor Management provides this level of safety. Although it is essential for the outsider to be familiar with the company's memorandum and articles of association in order to seek relief for the situation. How the doctrine of indoor management got its relevance or developed as the Turquand rule was through the landmark case of Royal British bank vs. Turquand^1. The case is discussed in detail further which would help in understanding the development of the doctrine of indoor management in a more precise manner. The case of Royal Bank v. Turquand, Turquand served as the rule's genesis. In this instance, the company's articles gave the directors the authority to borrow on bonds whatever quantities of money that might occasionally be authorised to be borrowed by a special resolution passed by the company's general meeting. The directors gave the plaintiff a bond bearing the company's seal, signed by two directors and the secretary, to protect the drawings (^1) [1856] 6 E. & B. 327

on the plaintiff's current account without the permission of any such resolution. On the basis of that tie, Turquand then sought to bind the Company. So, the primary legal issue in this case was whether the firm could be held accountable for that bond. The court determined that the bond was legally binding in this case because Turquand had a right to assume that the company's resolution had been adopted at the general meeting. So, the primary legal issue in this case was whether the firm could be held accountable for that bond. The court determined that the bond was legally binding in this case because Turquand had a right to assume that the company's resolution had been adopted at the general meeting. The court in this case opined that the company is bound for the decisions of it’s directors and if the directors had acted out of the scope of their powers the company would be held liable on behalf of them. Thus the court declared that bond issued by the directors was valid and that the company was liable, it was not necessary for the bank to verify if the due process of issuing such bond was followed or not, since it concerned the internal management of the company and not the outside. This how the doctrine of indoor management or “Turquand rule” was developed. In the case of Mahony v. East Holyford Mining Co. 2 The Turquand Rule was further explained by the House of Lords. The case is an excellent example of how the court establishes exceptions to the rule. In this case, payments were made by the company's bank based on a formal copy of a board resolution that authorised the payment of checks that were countersigned by the named "secretary" and signed by any two of the three named "directors." The document was individually signed by the secretary. The directors and secretary had never held a formal appointment, it was later discovered. According to the provisions, the board had the power to decide how checks should be signed, and the directors had to be chosen by the parties to the memorandum. The House of Lords ruled that the bank was not required to inquire further because it had already received formal notice of the board's decision in the usual manner. JUDICIAL APPLICATION OF THE DOCTRINE OF INDOOR MANAGEMENT The goal of this concept is taken into consideration while analysing the judicial interpretation of the doctrine of indoor management. The protection of all parties under a contractual connection is necessary in the field of business. A balance between business and the economy (^2) Mahony v. East Holyford Mining Co., [1875] LR 7 HL 869. 6

The doctrine of indoor management has seen its application further expanded by Indian courts in a few recent judgments. The goal remains the same, namely to safeguard the third party engaging in business with the company in good faith while being ignorant of the intricate internal workings of the company. Over a century has passed since the founding of the Doctrine of Indoor Management. It is crucial to broaden the scope of this doctrine because, if it remains narrow and completely in favour of the company's outsiders, it places the companies at significant risk. Companies today have taken on a central role in economic and social life in contemporary communities. The Doctrine of Indoor Management has eventually been subject to a number of exceptions in modern times, including the following:  KNOWLEDGE OF IRREGULARITY: The rule does not apply in cases where the party harmed by an irregularity had actual notice of it, which is the first and most evident restriction. The fact that the person contracting was also an active participant in the internal process may have given rise to knowledge of an irregularity. The first limitation is that the rule does not apply where the party who is impacted by it was aware of the irregularity or had knowledge of it. As a result, the transfer of shares was ruled to be invalid when it was approved by two directors, one of whom the transferor knew was ineligible since he was the transferee himself and the other had never been duly nominated. As discussed in the case of Devi Ditta Mal v. The Standard Bank of India^6 , where a transfer of shares was approved by two directors, but the transfer was declared ineffective because one of the directors was, to the transferor's knowledge, disqualified because he was the transfer's own director and the other had never been duly appointed. Company A had given money to Company B so that Company B may mortgage its assets. The method for doing so, which was outlined in the Articles for transactions of this sort, was not followed. Both firms shared the same Directors. The lender knew about this irregularity, hence the transaction was ruled by the court to be invalid. This Was held in the case of of T.R. Pratt(Bombay) Ltd. v. E.D. Sassoon & Co. Ltd.^7  SUSPICION OF IRREGULARITY Additionally, where the circumstances surrounding the contract are questionable and compel investigation, the Turquand Rule's protection is not applicable.. When an (^6) Devi Ditta Mal v. The Standard Bank of India AIR 1927 (^7) T.R. Pratt(Bombay) Ltd. Vs. E.D. Sassoon & Co. Ltd. (1936)

officer appears to be acting in a way that appears to be beyond the purview of his authority, suspicion should naturally follow. In the case of Anand Bihari Lal v. Dinshaw & Co^8 , the plaintiff accepted a transfer of property from the company's accountant, the transfer was deemed invalid. In the absence of a power of attorney, the plaintiff could not have assumed that the accountant was authorised to transfer the business's assets. Similar to this, in Haughton & Co v. Nothard, Lowe & Wills Ltd. 9 the court stated that it was something so unusual "that the plaintiff were put upon inquiry to ascertain whether the persons making the contract had any authority in fact making the contract had any authority in fact to make the agreement to apply the money of one company in payment of the debt to other." Any other rule would "put it." limited corporations at the mercy of any servant or agent who should purport to negotiate on their behalf, without any sufficient justifications for doing so.  FORGERY In the case when a third party relies on a document that was falsely created in the company's name. The company would not be liable for any actions done in consequence of such document. A business is never accountable for forgeries carried out by its employees. The Plaintiff in Ruben v. Great Fingall Ltd.^10 was the transferee of the share certificate issued with the defendant company's seal. The certificate was created by the company secretary, who faked the signatures of the two company directors and attached the business seal to the document. The plaintiff in this case argued that because the company's internal management is responsible for determining whether a signature is fake or real, the company should be held accountable. However, the court determined that the doctrine of indoor management has never been extended to cover a forgery. According to Lord Loreburn, a third party doing business with a company is not required to ask about their indoor management and won't be impacted by any irregularities they are unaware of.  NEGLIGENCE (WILFUL) If a third party engaging in business with a corporation could have learned about its management irregularities if they had done their due diligence, they would not be (^8) Anand Bihari Lal Vs. Dinshaw & Co. A.I.R. (1942) (^9) Haughton & Co v. Nothard, Lowe & Wills Ltd 1927] 1 KB 246 (CA) (^10) Ruben vs. Great Fingall Ltd,(1906)

The ideology of indoor management, which has been around for a century, has been adjusted to fit the demands of the present. This doctrine is only intended to safeguard the rights and interests of third parties who engage in business with the firm in good faith and to whom the company owes debts. This regulation focuses primarily on the notion that outsiders engaging in business transactions with public companies are not required to properly investigate the company's internal policies and practises and are also unaffected by any irregularities they may be unaware of. The Turquand rule has been used in numerous Indian instances to defend the rights of third parties against corporations. For the proper application of this doctrine, a number of exceptions, such as forgery, negligence, knowledge of irregularity, acts done outside the scope of the apparent authority, etc., have come to light. These exceptions strike a balance between providing reasonable protection to both the company and its outsiders.