ROYAL BRITISH BANK V. TURQUAND (1856) 119 ER 886
FACTS
- The managing director of The Royal British Bank, Turquand (who was the official manager, liquidator) of the insolvent Cameron's Coalbrook Steam, Coal and Swansea and Loughor Railway Company., entered into a loan agreement with a bank.
- The company had given a bond for £2,000 to the Royal British Bank, which secured the company's drawings on its current account.
- The company’s articles of association provided that directors have the power to borrow money on behalf of the company, subject to certain conditions.
- The bank relied on the belief that Turquand had the apparent authority to borrow on behalf of the company.
- However, it later came to light that the board resolution authorising the borrowing was not recorded in the company’s minute book. As a result, the company refused to repay the loan, arguing that the borrowing was not properly authorised.
- When the company was sued, it alleged that under its registered deed of settlement (the articles of association), directors only had the power to borrow up to an amount authorised by a company resolution. A resolution had been passed but did not specify how much the directors could borrow.
ISSUE
- Whether the bank, despite the irregularity of the board resolution, could recover the loan from the company?
HELD
The court ruled in favour of the appellant, the Royal British Bank, and determined that the bank had the right to recover the loan despite the irregularity in the board resolution.
- ● Sir John Jervis CJ, for the Court of Exchequer Chamber ruled that the bond was valid, so the Royal British Bank could enforce the terms. He said the bank was deemed to be aware that the directors could borrow only up to the amount resolutions allowed. Articles of association were registered withCompanies House, so there was constructive notice. But the bank could not be deemed to know which ordinary resolutions passed, because these were not registrable.
- The bond was valid because there was no requirement to look into the company's internal workings. This is the indoor management rule, that the company's indoor affairs are the company's problem. Jervis CJ gave the judgement of the Court in the following manner;
- JERVIS CJ. - I am of the opinion that the judgement of the Court of Queen’s Bench ought to be affirmed. I incline to think that the question which has been principally argued both here and in that Court does not necessarily arise, and need not be determined. The deed allows the directors to borrow on bond such sum or sums of money as shall from time to time, by a resolution passed at a general meeting of the Company, be authorised to be borrowed: and the replication shows a resolution, passed at a general meeting, authorising the directors to borrow on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlement and the Act of Parliament; but the resolution does not otherwise define the amount to be borrowed.
- Pollock CB, Alderson B, Cresswell J, Crowder J and Bramwell B concurred.
COMMENTARY
“The role of the doctrine of indoor management is opposed to that of the rule of constructive notice. The latter seeks to protect the company against the outsider, the former operates to protect outsiders against the company. The rule of constructive notice is confined to the external position of the company and, therefore, it follows that there is no notice as to how the company's internal machinery is handled by its officers. If the contract is consistent with the public documents, the person contracting will not be prejudiced by irregularities that may beset the indoor working of the company. The rule had its genesis in Royal British Bank v Turquand: The directors of a company borrowed a sum of money from the plaintiff. The company's articles provided that the directors might borrow on bonds such sums as may from time to time be authorised by a resolution passed at a general meeting of the company. The shareholders claimed that there had been no such resolution authorising the loan and, therefore, it was taken without their authority. The company was, however, held bound by the loan. Once it was found that the directors could borrow subject to a resolution, the plaintiff had the right to infer that the necessary resolution must have been passed.”