Royal British Bank v Turquand:
Case name: Royal British Bank v. Turquand, (1856) 6 E & B 327: (1843-60) All ER Rep 435
Jurisdiction: The Court of Exchequer Chamber
Decided on: 1st May 1856
The bench of judges: Jervis C.J.
What is the case about?
Royal British Bank v Turquand is a famous case that speaks about the liability of an outsider when he or she enters into a transaction with a company. Are outsiders responsible for ensuring that the terms of the transaction are properly authorized in the company? If yes, then to what extent?
This case answers these questions.
Facts of the case
In the instant case, the directors of Royal British Bank Ltd. (R.B.B) issued a bond to Turquand and borrowed money from him. The Articles of Association authorized the directors to issue such bonds with the approval of a proper resolution.
The directors were empowered by the Articles to borrow on bonds only such sums of money as the company in a general meeting resolves to borrow from time to time (through the passing of necessary resolution).
However, no such resolution was passed for authorizing the issue of bonds. And the directors issued a bond to Turquand without the authority of a necessary resolution.
Later, the repayment of the loan defaulted and the company was questioned to be liable. The claim was refused by the shareholders in the absence of the resolution.
In the given case, the question arose as to whether the company (R.B.B) was liable for repayment of the bond.
The rule laid down in Royal British Bank v Turquand
The case of Royal British Bank v Turquand is popularly known for laying down the doctrine of indoor management.
According to this principle, if an act is authorized by the articles or memorandum of a company, an outsider is entitled to believe that all of the specified formalities for carrying out that act have been followed by the company.
In other words, persons dealing with a company who have satisfied themselves that the intended transaction is not inherently inconsistent with the Memorandum and Articles, are not required to enquire about the validity of internal proceedings of the company. That is to say that when they contract with a company considering that the intended transaction falls within the purview of its Memorandum and Articles, they are entitled to presume that the provisions of the Memorandum/Articles have been observed by the officers of the company.
It is not the duty of outsiders to ensure that the company fulfills its internal regulations. It is sufficient that they ensure that the proposed transaction is permitted by the charter documents of the company. They by no means can know what does or does not take place inside the company.
Judgment of the Court in Royal British Bank v Turquand
Regardless of the fact that the bonds were issued without being authorized under a resolution, it was determined that Turquand could sue on the bonds since he was entitled to presume that the resolution had been legally passed.
It was pointed out that an ordinary person dealing with a company is entitled to assume that the necessary compliance or delegation of powers to the officer(s) dealing on behalf of the company has been made. He does not need to inquire beyond what is apparent and obvious from the situation.
In other words, an outsider is entitled to assume that, in relation to a contract entered into with him, all of the essential formalities to be carried out under the Articles or Memorandum have been duly carried out.
In this view, Lord Hatherley cited the principle of indoor management.
He observed that “Outsiders are bound to know the external position of the company, but are not bound to know its indoor management”.
Hence, the Courts held that the Royal British Bank was liable for the bond because Turquand was entitled to assume that the required resolution of the company in its general meeting (to authorize the issue of bonds) had been passed.
Turquand’s only duty was to ensure that the transaction was within the powers of the company’s Articles. As long as he ascertains this, the company shall be held liable if it fails to abide by the internal proceedings necessary to give effect to the transaction.
It was not the duty of Turquand to enquire whether the resolution had been actually passed or not.
Hence, he could sue the company on the bond. And the bond was binding on the company.
The “doctrine of indoor management”, as laid down in the case of Royal British Bank v Turquand, permits all those who deal with a company to believe that the terms & provisions of the articles have been followed by the company’s officials. Thus, those who deal with the company are not required to enquire about the regularity of internal proceedings.
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