The famous case of Royal British Bank v. Turquand laid down that A person dealing with a company must look only at the Memorandum of Association and the Article of Association to know the extent of the authority and not need to inquire into the regularity of the internal proceedings. Prior to this judgment there are several rules for protecting the person dealing with the company and most of the rules were almost entirely common law rule.

Background

The Memorandum of Association of the Company shall be lodged with the Registrar of Companies. This is available for public inspection since people engaged in business with the Company are free to inspect the document to see whether there is any limitation of powers or limitations on the business. It created a problem it deems outsiders to be aware of any limitations placed on the Company’s management. Therefore, if it was later found that there was an irregularity within the Company regarding any decision, it regards outsiders dealing with the Company to be aware of it.

Facts

1. They appointed Turquand as the official manager to liquidate the insolvent ‘Cameron’s Coalbrook Steam, Coal, and Swansea and London Railway Company’. This company was incorporated under the Joint Stock Companies Act of 1844.
2. The company had issued a bond of £2000 to the Royal British Bank, which secured the company’s drawings on its current account. The bond was under the seal of the company, signed by two directors and the secretary.
3. The plaintiffs, the Royal British Bank, for the non-payment of the same sued him.
4. The company claimed that, under its registered deed of settlement (the articles of association), the directors had only the power to borrow the company’s resolution had allowed what.
5. The defendants also pleaded that it had adopted no such resolution allowing the making of the bond and that they give any such bond without the authority and consent of the shareholders of the company.

Issues

Whether the company is liable for the loan?

Judgment

1. Sir Jervis was of the opinion that the judgment of the Court of Queen’s Bench should be upheld. He was inclined to believe that the question, which was mainly raised both in this case and in that Court, does not necessarily arise and does not need to be decided. His impression is that the resolution set out in the replication goes far enough to satisfy the requirements of the deed of settlement.
2. According to Sir Jervis, the deed allows directors to borrow on a bond the sum or sums of money which may be borrowed from time to time by a resolution passed at the General Meeting of the Company and the replication of the resolution, adopted at the General Meeting, authorizes the directors to borrow such sums on bonds for such periods and at such interest rates as they may deem expedient, in accordance with the act of settlement and the Act of Parliament; but the resolution does not otherwise define the amount to be borrowed.
3. Sir John Jervis CJ contended that it seems to me to be enough. If this is the case, the other question does not arise,  we do not need to decide; for it seems to us that the plea, whether we consider it to be a confession and a refusal or a special Non-est factum, does not raise any objection to that advance as against the Company.
4. He further said that – we can now take for granted that dealings with these companies are not like dealings with other partnerships and that the parties dealing with them are bound to read the statute and the act of settlement. But they’re not bound to do more than that. And the party here, reading the act of settlement, would find, not the prohibition of borrowing, but the permission to do so under certain conditions. In finding that the authority could be completed by a resolution, it would have the right to infer the fact of a resolution authorizing what appears to have been legitimately done in the face of the document.

Concepts Highlighted

1. According to the Turquand rule, any outsider who enters into contracts with a company in good faith is entitled to assume that the internal requirements and procedures have been complied with. Consequently, the company will be bound by the contract even if the internal requirements and procedures have not been complied with.
2. One cannot claim under the doctrine of the indoor management if the outsider is aware that the internal requirements and procedures have not been complied with; or if the circumstances under which the contract was concluded on behalf of the company are suspicious.
3. However, it is sometimes possible for an outsider to determine whether an internal requirement or procedure has been complied with. If this can be ascertained from the public documents of the company, the doctrine of disclosure and the doctrine of the constructive notice shall apply and not the indoor management rule.