The Royal British vs Turquand Case is one of the most significant decisions made by the English courts that significantly affected the general proceedings of companies all over the world. It is famous for the establishment of the Turquand rule popularly known as the doctrine of indoor management in the present day which protects the rights of the third parties dealing with the companies from being affected by the irregularities inside the company’s management and procedures. This article brings you a detailed case summary of the case, the key facts, and the judgment that affected the company law of the entire world.
The Royal British Bank V. Turquand Case Summary: Key Facts
The following are the key facts about the infamous Royal British Bank vs Turquand case which explain exactly what happened that led to the formation of the doctrine that is now included in the company laws of all the countries around the globe.
- Background: The Cameron’s Coalbrook Steam, Coal, and Swansea and Loughor Railway Company’s liquidator Mr Turquand issued bonds worth €2000 to the Royal British Bank which secured drawings from the current account of the company.
- Issue: The Royal British Bank went ahead with the transaction assuming that all the necessary internal procedures of the company have been properly followed. But, it turns out that the required company procedures such as passing a general resolution by the board of directors of the company have not been followed.
- Dispute: When the company failed to pay the specified amount to the bank, the bank filed a suit in a court of law as the company refused to pay because the loan transaction was unauthorized. In its defense, the company stated that the directors can only borrow the amount as per the resolution passed by the board under the deed of settlement registered.
The Royal British Bank V. Turquand Case: Legal Issue
The legal issue around which the case of Royal British Bank vs Turquand revolved was that, whether the third party (in this case the Royal British Bank) is bound to be aware of the internal rules and regulations of the company or it can just assume that the internal procedures of the company are followed as they should be.
The Royal British Bank V. Turquand: Judgment
The House of Lords ruled in favor of the Royal British Bank stating that the third party (RRB) dealing with a company is allowed to assume that the internal procedures of the company have been carried out as they should be even if they have not. This principle is now known as the doctrine of indoor management across the globe. The court held that the bank acting in good faith carried out the loan transaction with the official liquidator of the company and was not responsible if the resolution for the issue of bonds was not passed. The company cannot rely on its internal irregularities to avoid its obligations and liabilities to a third party.
Sir John Jervis for the court of the Exchequer Chamber declared the bond valid and stated that the bank would know that the directors can borrow only a certain amount of money the resolutions allow as it is registered under the article of association but it would not know if the procedure has been followed. The deed had the signs of two directors and the company seal. Hence, the company is deemed to pay the amount borrowed from the bank. The bank is allowed to assume that the company has complied with its own internal procedures even if the procedures have not been actually followed.
The Royal British Bank V. Turquand Case: Legal Principle
The case played a huge role in the formation of the doctrine of indoor management which is now one of the most important aspects of the corporate world. The doctrine provides that the outsiders who are dealing with a company can actually assume that all the internal procedures of the company have been followed by the company before the transaction even if there are any irregularities. This doctrine helps in the protection of the third parties who engage with the companies in good faith and prevents the companies from escaping their liabilities based on internal procedural failure.
This case clearly emphasized the fact that although the companies are indeed bound by the internal rules and regulations, the parties dealing with the companies should not be burdened with checking whether the rules have been followed or not. The doctrine helped the interests of the parties or entities dealing with the companies in commercial transactions.
However, if it is obvious and out in the open and it is easy to guess that there have been irregularities in the proceedings of the public documents of the company they are about to deal with then the doctrine of disclosure and the doctrine of constructive notice will be applied instead of the doctrine of indoor management.
Conclusion
The Royal British Bank Vs Turquand Case became a fundamental case in company law that laid out the foundation of the doctrine of indoor management that protects the parties from the hassle of keeping a check on the internal proceedings of the company they are dealing with. The doctrine has now become one of the key principles of modern-day company law, making it easier for outsiders to deal with the companies without any fear of being affected by internal procedural irregularities and failures.