INDOOR MANAGEMENT RULE/ THE RULE IN TURQUAND’S CASE

This rule was laid down in Royal British Bank v Turquand (must read) in this case the
company constitution provided directors with power to borrow on bond sums authorized
by the general resolution of the company. The directors borrowed 2000 pounds without
authorization. On demand the company argued that it was not bound since the directors
were not authorized to borrow. Court held that people dealing with the company have
only the duty to look at the company constitution (memorandum and articles of
association) and not to do any other inquiry. Thus since the company constitution gave
directors power to borrow the bank would infer that the resolution as required had been
passed.

Therefore, according to this rule people dealing with the company have only a duty to
look at its memorandum and articles of association and not to inquire into the internal
management procedures of the company.

According to Gower this rule is based on business convenience, demanding that people
dealing with the company to inquire in the company machinery would be making business
with the company impossible.

In Harriet Arinaitwe v Africana Clays Ltd Civil Suit No. 376 of 2013 it was held that:-

“The rule in Turquand’s case also known as the indoor management rule is premised not
on logic but on business convenience”

Further banks and other financial institutions are some of the pillars of a company and
there is need to protect money advanced to a company.

This rule entitles a person dealing with the company in absence of circumstances of
inquiry to assume that the internal management procedures have been duly complied
with.

It was developed to get rid of the constructive notice which required all people dealing
with the company to have constructive notice of its internal management

The rule was confirmed in the case of Mahony v East Holyford Mining Co. (1875) L R
7 HL 869. Where it was held that “When there are persons conducting the affairs of the
Company in a manner which appears to be perfectly consonant with the articles of
association, those so dealing with them externally are not to be affected by irregularities
which may take on the internal management of the Company.”

However, this rule has exceptions and these include:-

1. Knowledge of irregularity: The rule does not apply to a person who has knowledge of
the irregularities. A person who deals with the company and who has knowledge of
the irregularity in the Company’s internal management in connection to the subject
matter of his dealings cannot claim the benefit of the rule in Turquand’s case. A person
who himself is a party to the inside procedure, such as a director is deemed to know
the irregularities, if any. In the case of T.R Pratt (Bombay) Ltd. V. E.D. Sassoon &
Co. Ltd. - Company A lent money to Company B on a mortgage of its assets. The
procedure laid down in the articles for such transactions was not complied with. The
directors of the two companies were the same. It was held that the lender had notice
of the irregularity and hence the mortgage was not binding on the company.
In Howard v Patent Ivory Manufacturing Co. (1888) 38 Ch D, court stated that the
authorities which don’t require that somebody dealing with a company must make sure
that the internal regulations have been complied with does not apply in a case where
those seeking to enforce obligations against the company are its directors.
In Morris v Kanssen [1946] AC 459 two people purporting to act as directors
appointed Morris as a director and later allotted shares to him. Court held that having
acted as a director himself he couldnot rely on the rule.

However, a director who is not acting may rely on the rule as illustrated in the case of
Hely Hutchinson v Brayhead Ltd, (1967) 2 ALL ER 14 where the Plaintiff was
appointed a director but only attended a board meeting in May and after the meeting
an agreement was reached for the Plaintiff to advance money to the Company and an
indemnity was signed by the chairperson without authorization of the board meeting.
When the Plaintiff tried to enforce the indemnity the Company argued that it was not
bound since the chairperson was not authorized and the Plaintiff being the director
ought to have known. Court held that that Plaintiff could rely on the rule since he was
 not acting in his capacity as a director of the defendant company in entering into the
transaction of indemnity and guarantee and that transaction was not an unusual
transaction.

However, other officers of the company such as the secretary have been held to
benefit from the rule as illustrated in Emco Plastica International Limited V Sydney
Lawrence Freeberne Court of Appeal For East Africa Civil Appeal No 5 Of 1971
it was held that the secretary was not deemed to know that the director who signed
the contract was not authorized.

2. A person who has been put to inquiry cannot rely on the rule:- in B Liggett
(Liverpool) Limited v Barclays Bank: [1928] 1 KB 48 the articles of association
provided that cheques were to be signed by two directors, one of the directors gave
notice to the bank that cheques were not to be honored without his signature. A
cheque signed by Ligget and his wife who purported to have been appointed as a
director was paid by the bank. It was held that the bank could not rely on the rule since
they had been put on inquiry. Court noted that "the rule proceeds on a presumption
that certain acts have been regularly done, and if the circumstances are such that the
person claiming the benefit of the rule is really put on inquiry, if there are
circumstances which debar that person from relying on the prima facie presumption,
then it is clear, I think, that he cannot claim the benefit of the rule."

3. Where there is suspicion of irregularity the rule does not apply: in Houghton and Co
v Not Hard a person who was a director in two companies purported to pay debts of
one company using money from the other company. Court held that there was
suspicion as to whether he had powers to do so.

4. Forgery: The rule in Turquand’s case will not apply where a document on which the
person seeks to rely on is a forgery. In the case of Ruben vs. Great Fingall limited
(1906) Lord Loreburn observed that: “It is quite true that persons dealing with limited
liability Co.’s are not bound to inquire into their indoor mgt. & will not be affected by
 irregularities of which they have no notice. But this doctrine, which is well established,
applies only to irregularities that otherwise might affect a genuine transaction. It can’t
apply to a forgery”.

5. No knowledge of Articles: A person who has not actually read the memorandum and
articles of association of a company and who was not at the time he entered into the
contract, aware of their content cannot seek to rely on the indoor management rule.
The indoor management rule is based on the principle of estoppel and therefore
cannot be invoked in favor of a person who has not consulted the company’s
memorandum and articles. No one can rely and act upon something of which he was
in fact completely ignorant of. A person who does not have actual knowledge of the
company’s articles cannot claim as against the company that he was entitled to
assume that a power which could have been delegated to the directors was in fact so
delegated. In Rama Corporation v. Proved Tin and General Investment Co, the
plaintiffs contracted with the defendant co and gave a cheque under the contract. The
director could have been authorized but in fact, was not. The plaintiffs had not read
the articles. The director misappropriated the cheques and plaintiff sued. Held, director
not liable as it was outside his authority.

6. Acts outside apparent authority: The rule in Turquand does not apply where a person
acting on behalf of the company exceeds any actual or ostensible authority given to
him. A person who enters into a transaction with a company official who has acted
beyond official powers will not be protected by the rule in Turquand case.

DISCUSS THE APPLICABILITY OF THE INDOOR MANAGEMENT RULE IN UGANDA

IN LINE WITH THE COMPANIES ACT, 2012.