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The Law of Agency as applied in Company Transactions

by
"
MIHIR NANIWADEKAR

This article deals,from a common law perspective, with the applicationof the
law of agency to company transactions. The articlefocusses on the modifica-
tions made in the law of agency by company law rules such as the constructive
notice and indoor management doctrines.It highlights the difficultiesfaced in
reconciling the multiple strands of common law cases, particularly in the
operation of the indoor management rule; and suggests that legislative
clarification (over and above the UK Companies Act, 2006) may perhaps be
necessary to clarify the legalposition in this sphere.

Table of Contents ECFR 2008, 280 - 304

I. Introduction . ....
............ .... 281
II. The appointment of the agent ............... . 282
1. The organic theory .. .. ... .... . .. ... . ...... 283
2. The theory developed - "directing mind and will" 284
III. Agency and companies - ultra vires and constructive notice ................. 285
1. The capacity of the principal and the usual principles of agency 285
2. The ultra vires rule . .... . .... 286
3. The "constructive notice" rule ......................... .. 287
4. Constructive notice - positive or negative doctrine ? 288
5. The harshness of the rule .... ................. . . 290
IV. Agency and companies - indoor management and the exceptions ...... 291
1. The "indoor management" rule . ........ 291
2. The "indoor management" rule and ostensible authority ................. 293
3. Ostensible authority - a four-pronged test ...... .. 294
3. An example - ostensible authority of a secretary ...... ............ 296
4. Exceptions to the "indoor management" rule 297
V. Conclusion ................... .. . . . . . 303

National Law School of India University, Bangalore. I would like to thank Professor
M.P. Pillai, Professor of Law, National Law School of India University, Bangalore, for
his guidance. I would also like to thank the anonymous referees for their comments, and
Mr. V. Niranjan, Mr. S. Naravane and Mr. P. Chadha for the useful discussions which I
had with them.
ECFR 3/2008 The Law of Agency as applied in Company Transactions

I. Introduction

"This branch of law has developed pragmaticallyratherthan logically...

But it is possible to restate it upon a rationalbasis... "'
The law dealing with the principles of corporate liability is an extremely
elusive area dependent on numerous legal principles. This article seeks to
look at one aspect of this complex branch of law - the aspect of contractual
liability of companies under principles of agency. Under common law, this
area of law consists of a "jungle of conflicting cases"; 2 and the United
Kingdom had a strong opportunity of clarifying the position when it enacted
the Companies Act, 2006. Nonetheless, the British Parliament did not fully
deal with some of the most complex difficulties in this area, and - in my
submission - missed an important opportunity for putting things in the right
perspective Although certain issues were clarified, some other pressing
issues were not dealt with by the British Act. This note seeks to highlight the
position under common law and shows that the difficulties in completely
reconciling the case-law seem to suggest that countries which are con-
templating changes to their existing company law statutes (for instance,
India) would do well to go beyond the extent to which the British Parliament
has gone in the 2006 Act.
Ever since the celebrated (or, some would say, calamitous) decision in
Salomon v. Salomon & Co.4 it has been recognized that a company has a legal
personality of its own, separate from that of its shareholders. However, a
company is only a legal person - not a natural person. As such, it might be
argued that a company cannot perform certain acts on its own - it requires
the help of natural persons. This is where the doctrine of agency comes into
play. A company, it would seem, can act only through its agents. However,
this leads to a paradoxical situation - if a company can act only through an
agent, how does it appoint the agent in the first place ?' It would appear that
as a theoretical necessity, a company must be able to perform at least some
acts (take, for example, the appointment of its first agent) on its own. Now, if
a company can perform certain acts on its own (without the aid of agents), it
can logically incur primary and direct liability in addition to vicarious

1 Per Diplock LJ, in Freeman & Lockyer (A Firm) v. Buckhurst Park Properties(Mangal)
Ltd., [1964] 2 WLR 618 [hereinafter 'Freeman & Lockyer'.
2 See generally, Gower's Principles of Modern Company Law (6th edn., 1997)[hereinafter
'Gower'].
3 See generally, for a discussion on the new Companies Act, Paul Davies and John
Rickford, "An Introduction to the New UK Companies Act", (2008) European
Company and FinancialLaw Review 48 [hereinafter 'Davies and Rickford'].
4 Salomon v. Salomon & Co., [1897] AC 22.
5 See, Andrew Griffiths, Contractingwith Companies (2005) at 73 [hereinafter 'Griffiths'].
 Mihir Naniwadekar ECFR 3/2008

liability or liability based on the maxim of respondeatsuperior.This question

- of how a company can appoint its agents and how it can incur direct
liability - gives rise to interesting jurisprudential issues.
Once the dilemma of the appointment of an agent is resolved arises the
second major issue - the liability of the company for the acts of its agents. In
attempting to discuss this issue, the ordinary principles of agency cannot be
forgotten. However, because of certain peculiarities found only in compa-
nies, the usual principles of agency may require to be modified in their
application. Doctrines such as ultra vires, constructive notice, and indoor
management are important modifications in the law of agency as applied to
company law. Keeping these aspects in mind, this article seeks to discuss the
scope of authority of an agent - for which acts of its agent will the company
be liable? In seeking to answer this question, I will look at the application of
the doctrines of actual and ostensible authority to companies, keeping in
contemplation the effects of the aforesaid rules.
The brief second Section of this article will proceed to discuss how a
company can appoint an agent. In doing so, the jurisprudential question of
whether a company can act on its own will be surveyed. It will be seen as to
which actions can be attributed directly to the company. The theoretical
foundations of this direct liability will also be seen. The third Section will
then briefly discuss the principles of agency, particularly the concepts of
actual and ostensible authority. It will then discuss how these concepts apply
in company law. In particular, the effect of the ultra vires doctrine and the
constructive notice rule will be considered. Section Four of the essay will
analyze how the indoor management rule applies in the context of modifying
principles of agency as applied to companies. It will also discuss the
exceptions to the indoor management rule, seeking to analyse these rules and
exceptions in the light of the general principles of the law of agency. Effort
shall be made to harmonize case law which, at first glance, is conflicting. It
will be seen that the process of reconciling the several cases is intricate at best
and unattainable at worst. It is this difficult area of the indoor management
rule that the 2006 UK Act steers clear of. The difficulty with the
reconciliation of the case law is an important indicator that it might be
advisable for countries contemplating a new Companies Act to go beyond
the reforms introduced in the new UK Act.

II. The appointment of the agent

Often, it will be the Board of Directors or another individual or set of

individuals who are empowered to appoint the agents of the company. If the
Board is itself to be considered an agent, such a course is impossible because of
ECFR 3/2008 The Law of Agency as applied in Company Transactions

the maxim delegatus non potest delegare.6 However, jurisprudential analysis

suggests that the Board is not an agent - it is an organ of the company.7 Thus,
acts of the Board can be attributed directly to the company, and not
vicariously (as would be the case if the Board were to be a mere agent). This is
the basis of the "organic theory" which found a firm footing in the decision in
Lennard's Carrying Co.8

1. The organictheory

In certain situations, acts of certain individuals can be attributed directly to the

company, instead of vicariously through doctrines of agency. Thus, a
company (although acting through the mechanism of individuals) can have
certain acts attributed directly to it.9 This theory - the theory of the "alter ego"
- propounded in Viscount Haldane's judgment in Lennard's Carrying Co.
articulates a doctrine peculiar to company law distinct from the ordinary
principles of agency or vicarious liability. The actions of individuals
constituting the "directing mind and will"11 or the "alter ego"12 of the
company are directly attributed to the company itself." The position has been

6 See, for example, Peter Loose et al., Company Director:Powers, Duties and Liabilities
(8 h edn., 2000) at 23, where the authors state, "A company, like any other artificial
creature, can function only through its human agent, and those agents are directors by
whatever name they may be called."
7 It needs to be noted that each individual director may be acting in the capacity of an
agent of the company, while the Board itself would act as an organ. See, Gower, supra
note 2, at 179; Halsbury's Laws of England, Volume 7(2) (4"h edn., 1996) at 1115; A.
Ramaiya, Guide to the Companies Act (14" h edn., 1998) at 2791-2792 [hereinafter
'Ramaiya'].
8 Lennard's CarryingCo. Ltd. v. Asiatic Petroleum Co. Ltd., [1914-15] All ER Rep. 280.
9 Per Lord Hoffman, Meridian Global Funds Management (Asia) Ltd. v. Securities
Commission, [1995] 2 AC 500 at 506.
10 Lord Millet et al. (ed.), Gore-Browne on Companies (45th edn., 2005) at 7.17 [hereinafter
'Gore-Browne']. The Supreme Court of India had occasion to consider this theory inJK
Industriesv. ChiefInspectorof Factoriesand Boilers, (1996) 6 SCC 665. The Court cited
the English cases on the point, specifically approving of Lennard's case. The Court then
proceeded to state that where the "directing mind and will" test is applicable, doctrines
of vicarious liability come into play. With respect, it is submitted that this approach is
mistaken. Once organic theories are applied, the actions in question must be imputed
directly and not vicariously.
11 Tesco SupermarketsLtd. v. Nattrass, [1972] AC 153.
12 See, Y. Stern, "Corporate Liability for Unauthorized Contracts: Unification of the
Rules of Corporate Representation" 9 University of PennsylvaniaJournalof Business
Law 649 (1987).
13 In Viscount Haldane's now famous words, "... a corporationis an abstraction.It has no
mind of its own any more than a body of its own; its active and directing will must
consequently be sought in the person of somebody who for some purposes may be called
 Mihir Naniwadekar ECFR 3/2008

further clarified in the leading judgment of Lord Hoffman in the Meridian

case. 4 In Lord Hoffman's view, the primary rules of attribution are to be
found in the constitutional documents of the company - generally in the
articles of association - and these views are supplemented by general rules
including agency and estoppel."5

2. The theory developed - "directingmind and will"

Once it is seen that the acts of certain individuals or of the Board of Directors
(acting as an organ of the company) are directly attributable to the company,
the jurisprudential difficulty in the idea of a company appointing an agent are
cleared. 6 An agent can be appointed by the Board or by certain other
individuals whose acts in appointing the agent are directly attributable to the
company. In such a scenario, in legal terms, the result is that the company itself
has appointed the agent. Once the Board is considered to be an organ of the
company as opposed to an agent, it is exercising not delegated power, but
plenary power. 7 The maxim of delegatus nonpotest delegare would then be of
no application." Thus, when the "directing mind and will" of the company
appoints an agent, the result in law is that the company itself has appointed the
agent.
an agent, but who is really the directing mind and will of the corporation,the very ego
and centre of the personality of the corporation."
14 Meridian GlobalFunds Management (Asia) Ltd. v. Securities Commission, [1995] 2 AC
500. An Indian case on the point is GopalKhaitanv. State, AIR 1969 Cal 132, wherein it
was stated that directors were "organs of the company forwhose action the company is to
be held liable just as a naturalperson is to be held liable for the actions of his limbs."
15 See Ross Grantham, "Corporate Knowledge: Identification or Attribution?" 59
Modern Law Review 732 (1996).
16 An analogy can be seen with the application of criminal law to companies. The mens rea
of a company is often taken to be the state of mind of those individuals whose actions are
directly attributable to the company. See; Y. Stern, "Corporate Criminal Personal
Liability: Who is the Corporation?" 13 Journal of Corporation Law 125 (1987);
Cristina de Maglie, "Models of Corporate Criminal Liability in Comparative Law" 4
Washington University Global Studies Law Review 547 (2005). The constitutional
documents of a company can vest power directly in the Board of Directors, thereby
confirming them as an organ. See, Griffiths, supra note 5, at 95. Section 291 of the Indian
Companies Act, 1956, provides that the Board of Directors is entitled to exercise all such
powers, and to do all such acts and things, as the company is authorised to exercise and
do. This is subject to the provisions of the Act, and the constitutional documents.
17 See, Automating Self-Cleansing Filter Syndicate Co. Ltd. v. Cunninghame, [1906] 2
Ch. 34.
18 For a discussion on how the maxim applies with respect to delegation by directors, see,
R.K. Goel, "Delegation of Director's Powers and Duties" 18 (1) International &
ComparativeLaw Quarterly 152 (1969).
ECFR 3/2008 The Law of Agency as applied in Company Transactions

The question which then arises is whether, and to what extent, a company will
be bound by the actions of its agent. The answer would, no doubt, depend on
the application of the principles of agency. However, the application of the
normal rules of agency would be modified as applied to the law of companies. I
will now proceed to discuss how the rules of agency - particularly the rules
relating to the actual and ostensible authority of an agent - are varied in their
application to companies.

IIL Agency and companies - ultra vires and constructive notice

1. The capacity of the principaland the usualprinciples of agency

While an individual has complete legal capacity; in principle, a company can

only do those acts which it is authorized to do by its memorandum. 9 This is
the fundamental difference between an individual as a principal and a
company as a principal. Any act which is not authorized expressly or
impliedly by the memorandum is ultra vires the company. A company can
generally contract in the same form as an individual.2" The usual principles of
agency continue to apply - the principal will be bound if the contract by the
agent is within his authority. The authority of the agent can be either actual or
ostensible. Actual authority may be expressly granted or may be implied.
Actual authority stems from a legal relation between the principal and the
agent - the other party to the contract is independent to this relation. On the
other hand, ostensible authority, or apparent authority, is the authority with
which the agent is clothed in the eyes of the other party to the contract. 21 A
company will be bound by ostensible authority when it has represented - by
words or by conduct - to the other party that the agent has the authority to
enter into the particular transaction; ostensible authority is based on
principles similar to estoppel. 22 While the fields of actual authority and

19 Clive Schmitthoff (ed.), Palmer's Company Law (2 4 th edn., 1987) at 231 [hereinafter
'Palmer'].
20 Section 46 of the Indian Companies Act, 1956.
21 GHL Fridman, The Law ofAgency (4 th edn., 1976) at 110. See generally, GHL Fridman,
"Establishing Agency", 84 Law Quarterly Review 224 (1968). See also, Watteau v.
Fenwick, [1891-94] All ER Rep 897; Ramaiya, supra note 7, at 424-425; "Authority
and Powers of Agent" 2A CorpusJurisSecundum 143.
22 FMB Reynolds, Bowstead on Agency (17 h edn., 2001) at 307-311 [hereinafter
'Bowstead']. For the American position on this point, see Restatement (Third) of the
Law of Agency (200d) at S 1.03; and "Authority of Agent" American Jurisprudence(2 nd
edn, updated 2007) S 69.
286 Mihir Naniwadekar ECFR 3/2008

ostensible authority may overlap, this is not a necessity - the two are
conceptually different; and one can exist without the other.23
An interesting issue which arises in this connection is whether a representation
by an agent is sufficient to constitute apparent authority.24 The leading case of
Hambro v. Burnand offers guidance in this respect. 2 A representation by an
agent within the scope of his actualauthority is binding on the principal. Thus,
as Professor Montrose points out, a person dealing with the director of a
company can set up the apparent authority of the director, although his
information that he was dealing with a director came from the director himself
and not directly from the company.26
As stated above, a fundamental difference between a company as the principal
and an individual as the principal relates to the limited legal capacity of the
company - the ultra vires rule.

2. The ultra vires rule

Professor Thompson pointed out several years ago that the law need not
ascribe to the corporation the full capacity of an ordinary person. The House
of Lords has held that a company should only seek to ensure that the objects of
its incorporation are fulfilled.28 Under common law, the Professor notes, a
contract which seeks to bind a company beyond those objects is beyond the
contractual capacity of the company and is therefore void. 29 An agent of a
company cannot have the actual authority to perform an act beyond the
objects of the company." Neither can the principal be estopped from denying

23 Bowstead, supra note 22, at 308; Geoffrey Morse (ed.), Charlesworth'sCompany Law
(17 th edn., 2005) at 99 [hereinafter 'Charlesworth'].
24 See, J.L. Montrose, "Apparent Authority of an Agent of the Company" 50 Law
Quarterly Review 224 (1934) [hereinafter 'Montrose'].
25 Hambro v. Burnand, [1904] 2 KB 10.
26 Montrose, supra note 24, at 230.
27 Andrew Thompson, "Company Law Doctrines and the Authority to Contract" 11 (2)
University of Toronto Law Journal248 (1956) [hereinafter 'Thompson'].
28 The older theory was that a company had the power to do any act which its constitution
did not forbid. The next theory - on which the doctrine of ultra vires is based - equates
the capacity of the company to act with the sum total of the powers granted to it by its
constitution. See, Robert Pennington, Company Law (5 th edn., 1985) at 106 [hereinafter
'Pennington'].
29 Ashbury Railway Carriage& Iron Co. v. Riche, (1875) LR 7 HL 653.
30 Sutlej Cotton Mills Ltd. v. Ranjit Singh, AIR 1952 Punjab 263.
ECFR 3/2008 The Law of Agency as applied in Company Transactions

an act which is beyond one's legal capacity.31 Therefore, it would seem that
(under common law) the doctrine of ostensible authority (which is based on
the concept of estoppel) would have no application in the case of ultra vires
acts. Significantly, under Section 39 of the 2006 UK Companies Act, nothing
in the company's constitution can limit its capacity. While nothing prevents an
objects' clause from being included in a company's memorandum, the effect of
such a clause - as Professors Davies and Rickford point out - is only to limit
the authority of the company's agents and officers internally. Acting beyond
the scope of the objects' clause, then, would not in itself lead to invalidity of
the transaction.32
Turning back to the common-law position as distinct from the position under
the 2006 Act, third parties dealing with the company were protected; insofar
as the question of whether third parties were affected by the voidness resulting
from an ultra vires transaction depended on the knowledge of the third party.
However, this protection 33
was rendered rather illusory because of the
constructive notice rule.

3. The "constructive notice" rule

The "constructive notice" doctrine operates on the basis of the rule that all
persons dealing with a company have notice (either actual or constructive) of
the statute under which the company has been incorporated and of the public
documents of the company. 34 The nature of the doctrine can be analysed with
reference to (a) the powers of the company, (b) the actual powers of the
company's agents, and (c) the usual or ostensible authority of the company's
agents.35
With respect to (a) above, an impression can be created that the doctrine of
constructive notice is operative in regard to contracts ultra vires the company,
and such contracts are invalid because the party to the contract is deemed to
know that the contract is beyond the scope of the company's powers. This
reading is misleading. The limits of the legal capacity of companies is to be

31 Thompson, supra note 27. See also, Rolled Steel Productsv. British Steel Corporation,
[1986] Ch. 246; Stephen Mayson et al., Company Law (21" edn., 2005) at 661.
32 Davies and Rickford, supra note 3, at 58.
33 Gower, supra note 2, at 205.
34 Per Lord Hatherley in Mahoney v. East Holyford Mining Co., (1875) LR 7 HL 869; See
also, Ernst v. Nicholls, (1857) 6 HLC 401.
35 For analytical purposes, I propose to follow the outline proposed by Professor
Campbell in his famous article dealing with the doctrine. See, I.D. Campbell,
"Contracts with Companies. I - The Doctrine of Constructive Notice" 75 Law
QuarterlyReview 469 (1959) [hereinafter 'Campbell I'].
 Mihir Naniwadekar ECFR 3/2008

determined with reference to the limits set by law - the knowledge of the
parties is in no way material in this regard.36 To provide a simple analogy, the
reason why a contract against public policy is void is because under law, such
contracts are void. 7 It is entirely immaterial whether the parties to the
contract knew it to be against public policy or not - that is an external
constraint which has no role to play in the validity of the contract. With
respect to (b) above, when an agent acts entirely outside the scope of his
authority, the contract will not bind the company. The reason for this is not
that the third party is deemed to have knowledge of the authority of the agent
- the reason is simply a lack of authority. 8 The true scope of the doctrine is
seen in the third scenario outlined above. Notice - whether actual or
constructive - of the scope of the actual authority of an agent is "... effective to
nullify any greaterapparentauthority."39 Thus, when notice (either actual or
constructive) of the scope of actual authority has been given, the company
cannot be held out as having represented towards the existence of any greater
authority on part of the agent. The ostensible authority of the agent, as has
been seen earlier, depends on this "holding out" or representation by the
company. Thus, the true effect of the doctrine of constructive notice is to
neutralize any ostensible authority of the agent over and above his actual
authority.

4. Constructive notice -positive or negative doctrine?

The early cases on the constructive knowledge doctrine might be said to be

open to two interpretations. Professor Stiebel argued that the constructive
notice doctrine had a positive content.4" On the other hand, Professor
Montrose argued that the doctrine of constructive notice cannot be applied
against the company - in that sense it is a negative doctrine, not a positive
one. 41 It can be used, to borrow Lord Denning's phrase, 42 by the company as a
shield; it cannot be used by the other party as a sword. Thus, a person cannot
be stated to have relied (based on constructive notice) on a provision of which
he was actually ignorant.43 Where a third party claims that the company is
bound under ostensible authority on the basis of a delegation of a certain

36 Campbell I, supra note 35, at 470.

37 See, for example, Section 23 of the Indian Contract Act.
38 Campbell I, supra note 35, at 471.
39 Campbell I, supra note 35, at 471.
40 A. Stiebel, "The Ostensible Powers of Directors" 49 Law QuarterlyReview 350 (1933)
[hereinafter 'Stiebel'].
41 Montrose, supra note 24.
42 Lord Denning's observations were in the context of promissory estoppel.
43 Houghton & Co. v. Nothard Lowe and Wills Ltd., [1927] 1 KB 246; Rama Corporation
v. Proved Tin & GeneralInvestments Ltd., [1952] 1 All ER 554.
ECFR 3/2008 The Law of Agency as applied in Company Transactions

power, it is not enough that the articles allow for such delegation - it is
necessary that the other third party had actual notice of the articles." Unless
there is such actual notice, the third party cannot be said to have acted on the
basis of the representations of the company. A party who enters into a
transaction with a company without actual knowledge of the memorandum or
the articles cannot later set up the memorandum or articles as conferring
ostensible authority on the agent.4" This is the general position emerging from
Sargant L.J.'s judgment in Houghton's case (with which Atkin L.J. con-
curred).4 6 In Kredittbank Cassel's case,47 this position was followed as
Scrutton L.J. considered himself bound by the judgment in Houghton's case.
Nonetheless, Scrutton L.J. expressed his doubts as to how this fit in with the
constructive notice doctrine. Scrutton L.J. understood the doctrine to be that a
person is deemed to know of the company's public documents. He expressed
doubts as to why, if this can be used to the disadvantage of the third party, it
could not be used to his benefit also.
It can be argued - as done by Professor Stiebel - that the negative
understanding of the constructive notice doctrine has been changed in British
Thomson's case;48 and that the doctrine can be applied positively.49 The
argument for the defendants in that case was that the directors of the company
had no apparent authority apart from the articles. The plaintiffs had no actual
knowledge of the articles. However, the Court found in favour of the
plaintiff's. Thus, one can argue that the Court has recognized the positive
application of the constructive notice doctrine. However, it needs to be noted
that in this case, the plaintiffs did not have to set up the articles. Greer L.J.
found that the transaction came within the apparent authority of the directors
apart from anything in the articles. The articles were relevant only insofar as
they placed a restriction on the apparent authority - a classic case of the
negative application of the doctrine."0 Thus, the decision in British Thomson is
in harmony with the view that the constructive notice doctrine is of only
negative application. The rationale behind this is explained by Professor
Aharon Barak - constructive notice is incapable of creating a representation.
As the law does not recognize a constructive representation, only someone
who has actually seen the public documents of the company can claim that a

44 Underwood v. Bank of Liverpool, [1924] 1 KB 775.

45 Montrose, supra note 24, at 224.
46 Houghton & Co. v. Nothard Lowe and Wills Ltd., [1927] 1 KB 246.
47 Kreditbank Cassel v. Schenkers Ltd., [1927] 1 KB 826.
48 British Thomson-Houston Co. v. FederatedEuropean Bank, [1932] 2 KB 844.
49 Stiebel, supra note 40.
50 Montrose, supra note 24, at 234-235.
290 Mihir Naniwadekar ECFR 3/2008

representation has flown from them.5 One cannot actually rely on something
that one does not actually know. Thus, it is logically impossible to rely on
constructive notice because there is no representation to rely upon; and
without reliance, no question of estoppel can arise. The position is thus settled
- constructive notice is only a negative doctrine and it cannot be used by third
parties against the company.

5. The harshness of the rule

The rule of constructive notice, no doubt, operates harshly upon third parties.
As an example, one might consider the case of Re John Beuforte (London)
Ltd.52 An insolvent company's objects as stated in its memorandum were to
manufacture dresses. However, for a long period of time, the company was in
the business of manufacturing veneered panels. The claimant was a supplier of
fuel. He argued that the fuel would be needed no matter what the business of
the company was. However, this argument was rejected because the fuel had
been ordered on the company's letterhead which stated that the company was
a veneered panel manufacturer. The claimant was held to have actual
knowledge that the company was not in the business of manufacturing dresses
and constructive knowledge that the business it was carrying on was ultra
vires.
If this rule is to be applied strictly,53 third parties would be left unprotected.
Before entering into a contract, they would find it necessary to enter into
detailed investigations regarding the documents and internal transactions of
the company. Although a perusal of the company's constitutional documents
may reveal the existence of the procedures required under those documents, it
will not reveal whether those procedures have been complied with or not.54
Clearly, this is against business efficacy. In their attempt to mitigate the

51 A. Barak, "Company Law Doctrines and the Law of Agency in Israel", 18 (4)
Internationaland ComparativeLaw Quarterly 847 (1969).
52 Re John Beuforte (London) Ltd., [1953] Ch. 131.
53 English company law has been reformed to some extent in this regard. Section 35A (1) of
the English Companies Act as amended in 1989 states that in favour of a person dealing
with a company in good faith, the power of the board of directors to bind the company,
or to authorize others to do so, shall be deemed to be free of any limitations under the
company's constitution. See, Gower, supra note 2, at 213-214. The 2006 Act in Section
40 (1) broadly follows the scheme of the 1989 Amendment. See, Davies and Rickford,
supra note 3 at 59.
54 Derek Obadina, "Irregular, Intra-Vires Corporate Transactions and the Protection of
Third Parties in the UK and the Commonwealth - the Case for Reform: Part 1" 18 (2)
Company Lawyer 45 (1997).
ECFR 3/2008 The Law of Agency as applied in Company Transactions

rigours of this rule, Courts developed the "indoor management" rule, which
can come to the aid of outsiders contracting with the company. This will be
considered in greater detail in the next Section.

IV. Agency and companies - indoor management and the exceptions

1. The "indoormanagement" rule

The indoor management rule - or Turquand's rule - was expressed in the

leading case of Royal British Bank v. Turquand.5 Third parties dealing with a
company in good faith are entitled to assume that acts within the constitution
of the company have been properly performed. They are not bound to inquire
whether the acts of internal management of the company have been performed
regularly. 6 The rule gives rise to an irrebuttablepresumption - it is not open
to the company to prove that the acts were in fact irregular. 7 According to
Lord Simmons in Kanssen's case,58 the rationale is that to provide for the
protection of persons who are entitled to presume (because they cannot know)
that the person with whom they deal has the authority which he claims, if he
could have (potentially) had that authority.5 9 This is different from ostensible
authority; because in cases decided under ostensible authority, there is a
"holding out" by the company that certain power has been delegated; while
under the rule, the "holding out" (if any) is that power could have been
delegated.6" The rule seeks to protect innocent third parties who are acting
bona fide, 6 1 in the belief that the company is acting according to its
constitution. 62 Thus, wwhen the third party knows of the irregularity, the
benefit of the rule will not be available to it.63

In the words of the Madras High Court, "... though strangersto the Company
have constructive notice of the memorandum and articles they are entitled to

55 Royal British Bank v. Turquand,(1856) 6 E&B 327.

56 I.D. Campbell, "Contracts with Companies. II - The Indoor Management Rule" 76
Law Quarterly Review 115 (1960) [hereinafter 'Campbell II'].
57 Campbell II, supra note 56, at 116.
58 Morris v. Kanssen, [1946] 1 All ER 586.
59 Campbell refers to this possible authority as "potential authority" - as distinct from
actual and ostensible authority. Campbell II, supra note 56, at 116.
60 "Inherent Power as a Basis of a Corporate Officer's Authority to Contract" 57 (6)
Columbia Law Review 868 (1957) at 884.
61 Iron Traders (Pvt.) Ltd. v. HiralalMittal, AIR 1962 Punjab 277.
62 Shri Kishan Rathi v. MondalBros., (1967) 37 Company Cases 256; Nellai Metal Rolling
Mills Ltd. v. TheSouth India CentralBenefit Fund, (1986) 1 MLJ 370. See, K.M. Ghosh
et al., Company Law (13' edn., 2006-07) at 927.
63 Kotla Venkataswamy v. Chintu Ramamurthy, AIR 1934 Mad 579.
 Mihir Naniwadekar ECFR 3/2008

assume that the provisions therein contained have been complied with by the
officers ofthe company. "64 Other Indian decisions on the point are under noted
- these include Mufassil Bank's case, Dehra Dun Tramways, Siva Sanker
Panickeretc.6"
The most usual applications of the rule are in the case of de facto directors
where there are defects in the director's title to office, failure to hold a properly
convened meeting, etc.66 The rule of indoor management is not confined to
cases of potential authority arising under the constitutional documents alone.
It is applicable to cases where authority is conditionally granted under other
documents as well.67

64 Sri Minakshi Mills v. Callianjee, (1935) 68 MLJ 510. In this case, a firm was purporting
to act as the managing agents of a company in pursuance of a scheduled agreement
between the firm and the company. The firm was, under the articles, empowered to so
act only if the seal of the company was affixed on the scheduled agreement. It was held
that this affixing of the seal pertained to the internal management of the company, and
third parties were entitled to assume that the firm was a properly appointed managing
agent.
65 Ram Buran Singh v. Mufassil Bank Ltd., AIR 1925 All 206; and DebraDun Mussoorie
Electric Tramway Co. v. JagmanderDas, AIR 1932 All 141. In the latter of these two
cases, after referring to the former decision, the Court stated, "... a company is liable for
allacts done by its directorseven though unauthorizedby it providedsuch acts are within
the apparent authority of the directors and not ultra vires of the company. Persons
dealing bona fide with a managing directorare entitled to assume that he has all such
powers as hepurportsto exercise if they arepowers which, accordingto the constitutionof
the company, a managingdirector can have ... (emphasis supplied)." Whether the acts
need to be within the apparent or ostensible authority of the agent is a matter of debate
and has been discussed in greater detail later in the paper. See also, for other Indian
decisions relating to this point, DamodaraReddi v. Indian NationalAgenciesLtd., AIR
1946 Madras 35; C.K. Siva Sanker Panicker v. Kerala FinancialCorporation,MANU/
KE/0068/1980; Albert Judah v. Rampada Gupta, AIR 1959 Cal 715; The Hope Mills
Ltd. v. Cawasji Readymoney, (1911) 13 Bom LR 162; Secretary v. Allamelu Ammal,
AIR 1961 Mad 419; Mohanlal Ganpatramv. Shri SayajiJubilee Cotton Mills, MANU/
GJ/0003/1964; TR. Prattv. Sassoon & Co., AIR 1936 Bom 62 ;JindalStrips v. Madhya
PradeshElectricity Board, AIR 1998 MP 122.
66 Pennington, supra note 28, at 130-136. See, for an example, Dewan Singh HiraSingh v.
Minerva Films Ltd., AIR 1959 Punjab 106.
67 See, Mercantile Bank of India v. CharteredBank of India, [1937] 1 All ER 231, where
the authority was granted under a power of attorney.
ECFR 3/2008 The Law of Agency as applied in Company Transactions

2. The "indoormanagement" rule and ostensible authority

An interesting issue which arises is this - if an agent purports to exercise a

power which persons in his situation do not usually have, but which under the
articles could have been delegated to him, does the indoor management rule
apply?68
If the rule were held to apply, it might put companies in an untenable position
and might lead to absurd results. For example, if a provision in the articles
states, "The Board may delegate the power to enter into contracts, provided
the value of the contract is below Rs. 1 million." In such a case, if a sweeper of
the company purports to exercise that power, and if the rule were held to
apply, it would mean that the sweeper could bind the company up to Rs. 1
million. This seems to be an absurd result. On the other hand, if the rule were
held to not apply to such situation, then it would appear that the only case
wherein the rule would apply is where the agent had ostensible authority.
Thereby, the principal company would be bound in any case - the rule does
not seem to serve any purpose.
This latter argument - that the rule would not serve any purpose - is
misconceived, for the rule does play the important role of negating the
influence of the constructive notice doctrine. For example, let us assume that
the articles have a clause which says, "The Board may delegate the power to
enter into contracts, provided the value of the contract is below Rs. 1,00,000 to
the managing director by means of a resolution to that effect." Let us also
assume that a managing director does have, in usual cases apart from the
articles, the ostensible authority to enter into contracts up to the stated
amount. Now, if the director represents to the third party that he has the
authority to enter into a particular contract, the operation of the constructive
notice doctrine would mean that the third party would be deemed to know
that the authority is conditional on a resolution. If the indoor management
rule did not exist, the third party would have to make sure that such a
resolution was in fact passed. The operation of the indoor management rule -
even in cases such as the present example where ostensible authority would
exist, but for a specific restriction in the articles (in this case, the necessity of a
resolution) - will mean that third parties are entitled to assume that the power
has in fact been validly conferred by means of a special resolution.
Thus, even if the rule is confined to cases where ostensible authority does exist
apart from the articles, it does serve an important function. On the other hand,
if the rule is expressed in broad terms with no limits on its application to cases
where such ostensible authority does exist, it would lead to absurd results as

68 Campbell II, supra note 56, at 123.

 Mihir Naniwadekar ECFR 3/2008

pointed out in the first example above. Therefore, if an agent purports to

exercise a power which persons in his situation do not usually have, but which
under the articles could have been delegated to him, the indoor management
rule should not apply. It is further submitted that one can find a principled
justification for this non-application of the rule - over and above the argument
that application will result in absurd results. This justification is that where
"unusual" transactions are being entered into, the third party will be put on
inquiry.69 And if the third party has been put on inquiry, clearly he cannot be
allowed to rely on the presumption in his favour. Being put on inquiry is a
classic exception to the indoor management rule.' There are numerous cases
on this point, and they too support the conclusion that the indoor manage-
ment rule does not apply to cases where the agent would not have any
ostensible authority apart from the articles."
These cases will be considered later when we deal with the exceptions to the
indoor management rule. Prior to that, the scope of ostensible authority will
be surveyed.

3. Ostensible authority- a four-prongedtest

As seen above, the indoor management rule is applicable in cases where the
agent of the company would have the ostensible authority to enter into the
particular transaction. The question which naturally presents itself at this
juncture is - what is the ostensible authority of an agent of the company? As a
general answer, Lord Diplock formulated a four-point test in order to
determine when the acts of an agent (which are outside the actual authority of

69 As an example of this, one might consider Underwoodv. Bank of Liverpool, [1924] 1 KB

775. In this case, the major shareholder and only director of a company paid cheques
drawn in favour of the company into his own account. The bank was held to be put on
inquiry and was unable to rely on the indoor management rule. The logic behind
holding that the bank was put on inquiry can be that the transactions in question in this
case were "unusual".
70 Gore-Browne, supra note 10, at 8.20.
71 Professor Gower in an earlier edition of his work - LCB Gower, Principlesof Modern
Company Law (2nd edn., 1957) at 152 [hereinafter 'Gower 2 nd edn.'] -formulates a rule
that where an unusual power is permitted to be conferred by the articles, a person who is
aware of the articles may rely on it. See also, Campbell II, supra note 56 at 124, where
Professor Campbell says, "... it is being assumed that the person purportingto have the
power to sign is not aperson who would normally, in view of his office, have such power.
This fact may be sufficient to put the other party on inquiry, in which case he must go
further... But the exercise of a power of delegation may be normaland regular,although
it confers on aperson apower he would not normallypossess. In such a case, the outsideris
notput on inquiry, and the indoormanagement rule in its extendedform may well apply
... (emphasis supplied)."
ECFR 3/2008 The Law of Agency as applied in Company Transactions

the agent) can be held to be binding on the company.72 Before the company can
be said to be bound under ostensible authority, the following four conditions
should be satisfied :73
- A representation should be made to the third party that the agent had the
authority to enter on behalf of the company into a contract of the kind
sought to be enforced
- The representation should have been made by a person or persons who had
the actual authority to manage the business of the company either generally
or in respect of those matters to which the contract pertained to
- The third party should have been induced by the representation to enter
into the contract
- Under its memorandum or articles, the company should not have been
deprived of the capacity either to enter into a contract of the kind sought to
be enforced or to delegate authority to enter into a contract of that kind to
the agent
In Armagas Ltd. v. Mundogas SA, 74 it was held in the same vein, "Ostensible
authority comes about where the principal, by words or conduct, has
represented that the agent has the requisite actual authority, and the party
dealing with the agent has entered into a contract with him in reliance on that
representation." 75 In more recent cases, the Court of Appeals has stated that
ostensible authority is a form of estoppel by representation, and has expressly
followed Freeman & Lockyer. 76 This four-pronged approach is useful in
making a conceptual distinction between ostensible authority and implied
authority. While implied authority is the authority which must have been
granted impliedly, ostensible authority arises as a result of a representation by
the principal creating the impression of authority. Thus, implied authority
remains a form of actual authority. Acts done under implied authority bind
the principal and there is no need to examine the question of ostensible
authority. In such a case, then, the existence of a representation is irrelevant -

72 Freeman & Lockyer, [1964] 2 WLR 618.

73 The fourth condition is no longer relevant in England after the virtual abolition of the
constructive notice doctrine by the new Section 35 introduced in the Companies Act
Amendment, 1989; followed by Section 39 of the 2006 Act. See, John Farrar, Company
Law (3rd edn., 1991) at 375.
74 [1986] AC 717.
75 This was approved in the leading Indian Supreme Court case on the point, Chairman,
LIC v. RK Bhasker, AIR 2005 SC 3087.
76 See, for example, SMC Electronics v. Akhter Computers, Case No. B2/1999/0615/
CCRTF (Court of Appeals, November 2000); and Gurtnerv. Beaton, (1993) 2 Lloyd's
Rep. 369.
 Mihir Naniwadekar ECFR 3/2008

the existence of ostensible authority does not make a difference. Only when
implied authority is not sufficient to bind the principal does one have to go
into the question of whether there exists any ostensible - or apparent -
authority to bind the principal.77
While the description in Freeman & Lockyer is useful as a general guideline,
the precise scope of ostensible authority would depend on the factual
circumstances of the particular case - nevertheless, a typical example will be
assessed. In particular, and because of what seems to be a changing legal
position, a few cases dealing with the ostensible authority of company
secretaries shall be examined.

3. An example - ostensible authority of a secretary

Strictly speaking, the powers and functions of the secretary of a company are
ministerial and administrative.7 8 A secretary was traditionally understood as
not concerned in the carrying on of the business of the company.79 Thus, the
secretary would have no ostensible authority to bind the company in
transactions related to the carrying on of its business. In fact, it was held in an
early case that a secretary does not have any authority to represent anything at
all.80 However, the Court of Appeal seems to have broadened the horizon of
the secretary's authority by its pronouncement in PanoramaDevelopments.81
In the short words of Lord Denning M.R., the Court recognized that "...
times have changed" and the secretary could enter into contracts on behalf of
the company which come within the day-to-day running of the companies
business.82 Times have certainly changed up to the present day - it seems rather

77 Ingrid Patient, "Implied Authority", 35 (4) Modern Law Review 419 (1972).
78 Gower, supra note 2, at 197. The discussion here looks at the ostensible authority of the
company secretary. Managing directors will, in general, have wider ostensible
authority. See, Derek Obadina, "The Transactional Authority of a Managing Director"
9 (11) InternationalCompany and Commercial Law Review 321 (1998).
79 Re Maidstone Building ProvisionsLtd., [1971] 1 WLR 1085.
80 "A secretaryis a mere servant;his positionis that he is to do what he is told, andno person
can assume that he has any authorityto represent anythingat all..." Per Lord Esher MR
in Barnett, Hoares & Co. v. South London Tramways Co., (1887) 2 QBD 815. These
observations were approved in George Whitechurch Ltd. v Cavanagh, [1902] AC 117;
and supported by Ruben v. Great Fingall Consolidated,[1904-07] All ER Rep. 460.
81 PanoramaDevelopments (Guildford) Ltd. v. Fidelis FurnishingFabrics Ltd., [1971] 3
All ER 16.
82 According to Professor Gower, this decision can be seen as supporting the argument
that the secretary has "graduated" into an organ of the company. However, a secretary
has, even at present, no responsibility for corporate policy. He only plays an
ECFR 3/2008 The Law of Agency as applied in Company Transactions

difficult to argue that the secretary cannot have any ostensible authority
whatsoever.
Having looked at this example, I shall now look at the exceptions to the indoor
management rule.

4. Exceptions to the "indoormanagement" rule

It will be convenient to discuss the exceptions to the indoor management rule

under the following broad heads: (a) "unusual" transactions; (b) fraud; (c)
where the contracting party is not a "stranger"; and (d) imposition of a duty to
inquire. The applications of the first and the second of these have the tendency
to give rise to difficulties, and these two shall therefore be discussed in greater
detail.

a) "Unusual" transactions

It is submitted that for the indoor management rule to apply, it is necessary

that the transaction in question must be within the usual or ostensible
authority of the agent.83 In cases where "unusual" transactions are entered
into, the rule cannot be set up by third parties.
The locus classicus on the point is Freeman & Lockyer.84 In that case, the Court
considered the previous decisions on the point; and a discussion of those
previous cases is apposite at this juncture.
In Houghton's case,8" the articles of the defendant company empowered the
directors to "delegate to any managing director, local board, head manager,
manager, attorney or agent any of the powers ... vested in the directors." The
authority there was circumscribed, because it indicated by description the
persons to whom the authority might be delegated. In that case, the Court
came to the unanimous conclusion that the company was not bound. Rama
Corporation'scase,86 where Houghton was followed, was a case wherein a
director had purported to enter into a joint venture agreement with the third

"administrativerole in ensuring that the policy decisions are implemented." See, Gower,
supra note 2, at 199.
83 The justifications for this have already been discussed. The principled rationale behind
this submission is, of course, the "put on inquiry" rationale which has been briefly
examined earlier.
84 Freeman and Lockyer, [1964] 2 WLR 618.
85 Houghton & Co. v. Nothard Lowe and Wills Ltd., [1927] 1 KB 246.
86 Rama Corporationv. Proved Tin & General Investments Ltd., [1952] 1 All ER 554.
298 Mihir Naniwadekar ECFR 3/2008

party regarding the purchase of certain invoices of another company at a

discount. On those facts, although the articles of the company allowed for the
Board to delegate its power,87 it was held that the company was not bound
under the indoor management rule. On the other hand, in British- Thomson,88
under the articles of the defendant company, the directors had the power to
delegate those powers conferred as they might consider requisite for carrying
on the business of the company. The Board also had the power to determine
who should be entitled to sign contracts and documents on behalf of the
company. Although the power of such delegation was not actually exercised,
the company was held bound by a guarantee given to the plaintiffs by the
chairman of the Board. In Rama Corporation,Slade L.J. followed Houghton's
case, 89 and refused to follow British-Thomson, which he considered to be
conflicting with Houghton.
In Freeman & Lockyer, an attempt was made to reconcile these seemingly
conflicting decisions. It was stated that Slade L.J. was mistaken insofar as he
stated that Houghton and British-Thomson were conflicting. The Court
reasoned that Houghton and Rama Corporation were cases wherein the
transactions were "unusual" while British-Thomson was a case wherein the
transactions were "usual". Therefore, the Court came to the conclusion that in
cases of "unusual" transactions, the indoor management rule is inapplicable
while in the case of "usual" transactions, the rule was inapplicable.
While respect to this reasoning of the Court in Freeman & Lockyer, it is
submitted that Rama Corporationand Houghton were not in fact decided on
this point. In those cases, the third party had no actual knowledge of the
constitutional documents - they sought to rely on the constructive notice
doctrine. These cases were decided on the anterior point that the constructive
notice doctrine cannot apply positively. The Court in those cases did not have
to go into the question of whether the transactions were usual or not, because
the third party did not have any knowledge of the articles at all. Therefore,
there was no representation which was relied upon by the third party, and no
occasion arose for the application of the indoor management rule at all. In
British-Thomson on the other hand, there was a reliance on the representation
of the chairman of the Board. Therefore, it is submitted that the material
distinction between these two sets of cases is that in one set, there is reliance on
a representation made, while in the latter set, there is no representation at all.

87 Article 119 of the defendant company's articles stated, "The directors may delegate any
of their powers, other than the power to borrow and make calls, to committees
consisting of such members of their body as they think fit." The Board had not in fact
delegated any of their powers.
88 British Thomson-Houston Co. v. FederatedEuropean Bank, [1932] 2 KB 844.
89 Houghton & Co. v. Nothard Lowe and Wills Ltd., [1927] 1 KB 246.
ECFR 3/2008 The Law of Agency as applied in Company Transactions 299

It is on this additional ground that the cases can be differentiated, and also - as
done by Freeman & Lockyer - on the grounds of "usual" and "unusual"
transaction. In any event, though, Freeman & Lockyer seems to settle the
position that an *unusual transaction" is an exception to the indoor
management rule.

b) Fraud

It has been held that if the agent has entered into a fraudulent transaction, the
indoor management rule is not applicable.9" This rule gives rise to peculiar
difficulties if one tries to find a jurisprudential basis for the exclusion. Lord
Loreburn stated in Ruben,9 in a statement which was applied in Kreditbank
and South London GreyhoundRacecourses,92 that the indoor management rule
did not apply to a forgery. 93 These cases seem to be directly contradictory with
cases such as Mahoney,94 where inasmuch as the document in question
appeared on the face of it to satisfy the requirements of the articles, the
plaintiffs, who were acting in good faith, were not affected by irregularities in
the proceedings of the secretary. So it would appear that the rule applies in
cases of irregularity,but not to cases of fraud.
Professor Campbell tries to explain these decisions on the basis that fraud can
be of two types - first, when the executor of the forged instrument does not
purport to act as an agent; and secondly, those when he does. The indoor
management rule, according to Professor Campbell, cannot apply in the
former case. However, the learned Professor himself states, "... there is an
" 9' For example, Ruben's case itself;
irreconcilable conflict in the authorities.
the signatures of two directors were forged by the secretary. This would seem
to suggest that the case falls squarely into the former category. Nonetheless,
the secretary had also sealed the document with the company seal - thereby
performing a representative act. This would suggest that the case fell into the

90 If a company represents that a document is genuine, it can be estopped from denying the
same. Similarly, a company may be liable in tort for a fraud committed by its agent in a
matter within the usual scope of the agency. See, Campbell II, supra note 56, at 130.
91 Ruben v. GreatFingallConsolidated,[1904-07] All ER Rep 460.
92 Kreditbank Cassel v. Schenkers Ltd., [1927] 1 KB 826; South London Greyhound
Racecourses Ltd. v. Wake, [1931] 1 Ch. 496.
93 It was rather unnecessary for Lord Loreburn to make such a statement in Ruben - that
case was actually decided on the point that the secretary issuing the share certificate had
exceeded his ostensible authority. See, Campbell II, supra note 56, at 131; Gower 2nd
edn. , supra note 71, at 157.
94 Mahoney v. East Holyford Mining Co., (1875) LR 7 HL 869.
95 Campbell II, supra note 56, at 133.
 Mihir Naniwadekar ECFR 3/2008

latter category. In Kreditbank,on facts, the only basis for alleging forgery was
a lack of authority. Thus, it becomes difficult in practice to decide where to
draw the line between the two categories noted by Professor Campbell.
An attempt can be made at arriving at a jurisprudential basis for the exception
through a reconciliation of the cases on the point in the following manner. In
case of an irregularity, there is a problem in the relation between the principal
(P) and the agent (A). That does not affect the validity of the transaction
between A and the third party (T). However, in a forgery, the transaction
between A and T is itself null and void. Thus, the relation between A and T
itself is affected. In case of irregularity, what has been done is (for example) a
valid Promissory Note has been executed. In case of fraud, no Promissory
Note has been executed at all. Thus, the chain of the transaction is affected at
the stage between T and A; while in irregularity, it is affected at the stage
between A and P. The latter cannot nullify the operation of the indoor
management rule, because T is unaffected by it. On this basis, it might be
argued, that the "apparently irreconcilable" authorities can be brought
together.
The problem with this reasoning is the case of Grace,Smith & Co.96 The Court
held in that case that a principal is liable for the fraud of his agent acting within
the scope of the agent's authority, whether the fraud is committed for the
benefit of the principalorfor the benefit of the agent. In the facts of that case,
the fraud was committed by the agent on the third party, and the transaction
between them should have been void.97 It seems that this decision is in
contradiction with Ruben's case." In such a situation, one must agree with
Professor Campbell - the decisions are indeed irreconcilable.
Professor Thompson has argued that the "forgery" exception to the indoor
management rule is inconsequential because in such cases the third party will
be able to bring his case within the traditional understanding of ostensible
authority. There is no need for the third party to rely on the indoor
management rule.99 Professor Thompson says, "While there can be no advance

96 Lloyd v. Grace, Smith & Co., [1912] AC 716 [hereinafter 'Grace, Smith and Co.']
97 In Grace,Smith & Co., a clerk of the defendant firm was allowed to represent the firm as
if he was a partner. The plaintiff came to see the firm about selling certain property. The
clerk fraudulently induced her to convey the property to him. This decision can be
justified on the broad policy consideration that where one of two innocent parties must
lose by the fraud of another party, it is more reasonable that "... he that employs andputs
a trust and confidence in the deceiver should be a loser than a stranger." Stiebel, supra
note 40, at 355.
98 Strangely, Ruben was cited before the Court in Grace,Smith & Co. See also, Kreditbank
Cassel v. Schenkers Ltd., [1927] 1 KB 826.
99 Thompson, supra note 27, at 275.
ECFR 3/2008 The Law of Agency as applied in Company Transactions

authorityfor, and no ratificationof, a forgery ... there seems to be no point of

principle precluding the operation of an estoppel against the assertion of a
forgery, and, consequently, no reason why apparent authority may not be
pleaded." This statement is undoubtedly true in the cases where the premise
that there exists an operation of an estoppel against the assertion of a forgery is
true on facts. However, a "fraud" exception has specifically been acknowl-
edged by the Courts. As Professor Thompson himself acknowledges, "...
confusion has resulted from the statement that the indoor management rule
does not apply to forgeries".10 This confusion has resulted because "...
insufficient attentionis paidto principles of agency while too much attentionis
paid to the fact that a corporateentity is involved... "101 Professor Thompson's
analysis concentrates on the basic principles of authority and agency - while
that may be an ideal guide for the Courts to proceed upon, they have not been
particularly inclined to do so. Thus, although Professor Thompson's analysis
may not be sufficient to explain all the decisions in this area, it is a useful tool
for deciding the basis on which the "fraud" exception must be restated. In view
of this, it is submitted that the "forgery" exception should be applied only in
cases where the person executing the document has not done so as an agent.
Ruben's case, if read broadly, would be in direct conflict with Turquand's
case. In such a scenario, it might be best to suggest that the hard cases of the
type seen in the above discussion should be decided on agency principles on
the basis of authority, 10 2 rather than trying to draw out any wide exceptions to
the indoor management rule.

c) Contractingparty not a "stranger"

Another exception to the indoor management rule is when the other

contracting party is not a "stranger" but is an "insider". The logic behind
this is eminently reasonable - an insider is, unlike a stranger, in a position to
know whether or not internal regulations have been fulfilled or not. Thus, a
director in a company will be unable to rely on the indoor management rule as
against that very company in which he is the director." 3 However, the scope of

100 Thompson, supra note 27, at 274.

101 Thompson, supra note 27, at 287.
102 See, Gore-Browne, supra note 10, at 7-9; Pennington, supra note 28, at 135-136.
103 Morris v. Kanssen, [1946] 1 All ER 586. As seen earlier (see supra note 53), Section 35A
of the English Companies Act states that in favour of a person dealing with a company
in good faith, the power of the board of directors to bind the company, or to authorize
others to do so, shall be deemed to be free of any limitations under the company's
constitution. An interesting issue which arises in this regard is as to whether the
"insider-outsider" distinction is relevant in determining the scope of the words "person
dealing with the company". See, Smith v. Henniker-Major & Co., [2002] 2 BCLC 655,
 Mihir Naniwadekar ECFR 3/2008

this exception has been narrowed down to some extent. In the case of some
transactions, a director may very well be in the same position as a -'stranger".
A director, when transacting in his individual capacity, need not be in a
position wherein he could know whether the internal rules have been
complied 0with. In such a case, this exception will not be available to the
14
company.
The true test when dealing with a contracting party who is not a stranger, it
would appear, is this - was the contracting party in a position in which he
could reasonably have known whether the internal rules in relation to the
particular transaction were complied with? If the answer is "yes", then the
contracting party is not a stranger but an insider, and the indoor management
rule is inapplicable.
This takes us to the final exception to the indoor management rule.

d) Imposition of a duty to inquire

Clearly, where a duty to inquire is imposed on the third party, the third party
cannot rely on the representation of the agent."' 5 In such a situation, the basis
of the indoor management rule is taken away, and clearly the rule would be
inapplicable. This exception is not necessarily independent in itself - often, it
will be the resulting position when a case falls under another exception. For
example, a decision of the erstwhile Oudh High Court in India suggests that
when there is suspicion of an "unusual" transaction, a duty to inquire might
result.0 6 Thus, it is evident that the imposition by law of a duty to inquire can

where the Court of Appeals held by majority that the distinction was relevant in
construing the words "any person", and the benefit of the Section could not be claimed
by the Chairman of the company. The minority Judge refused to narrow the scope of
the words "person dealing with the company" by importing the "insider-outsider '
distinction. For a strong criticism of the majority's approach in this case, see, Jennifer
Payne, "Company Contracts and Conundrums: when is a Board not a Board and when
is a Director not a Person?", (2004) European Company and FinancialLaw Review
235.
104 Hely-Hutchinson v. Brayhead Ltd., [1967] 3 WLR 1408. See, Mark Steward,
"Company Law: Contracts - Defects in Corporate Authority - Operation of the
Indoor Management Rule" 5 (7) InternationalCompany & CommercialLaw Review
132 (1994).
105 Underwood v. Bank of Liverpool, [1924] 1 KB 775. See, Palmer, supra note 19, at 153;
Charlesworth, supra note 23, at 103.
106 Anand Behari Lal v. Dinshaw & Co., AIR 1942 Oudh 417. In this case, an accountant
had entered into a transaction to transfer the property of the company. This was outside
the ostensible authority of the accountant. The Court stated that in such circumstances,
there would be a duty to inquire imposed upon the third party. Therefore, the third
ECFR 3/2008 The Law of Agency as applied in Company Transactions

be, and often is, the effect in law of one of the other exceptions. It is in this
manner that the true nature of this exception is best analyzed.
It is in this sphere of the application of the law of agency to company
transaction - specifically, the indoor management rule and its exceptions -
that the 2006 UK Act does not offer a solution. It would have been possible for
the legislature to decide how the indoor management doctrine and its
exceptions are to be understood. For instance, it might have been useful to
explicitly determine and define the sphere of operation of the various
exceptions in general and the fraud exception in particular. By not doing so,
the Act has left it up to the Courts to attempt the impossible by reconciling the
many divergent streams seen in the decisions discussed above." 7 In this regard,
perhaps, other countries may do better in specifically providing some
guidelines for the Courts to proceed upon.

V. Conclusion

This essay has analysed the application of the principles of agency to company
transactions. First, the theoretical basis upon which a company can appoint an
agent has been surveyed. The organic theory, it will be seen, offers a concrete
and jurisprudentially sound explanation to the complex question of how a
company can appoint its agents. This paper has then proceeded to look at how
a company is different as a principal from individual principal. It has been
noticed that the ultra vires doctrine is at the root of the difference. The
constructive notice rule and its applications have been analysed.
The constructive notice rule - it has been seen - did not keep in mind
commercial expediency. Therefore, to subdue the torrent of the harsh
operation of the constructive notice rule against third parties, Courts
developed the indoor management rule. The relationship between this rule
and the doctrine of ostensible authority has been surveyed. There is - it has
been submitted - a strong pragmatic as well as doctrinal justification for
aligning the indoor management rule with ostensible authority of the agent.
The interplay of these two concepts has been analysed in detail and the case-

party could not rely on the internal management rule. For a similar argument, see,
Derek Obadina, "Statutory Reformations of the Rule in Turquand in Commonwealth
Jurisdictions" 8 (5) InternationalCompany and Commercial Law Review 158 (1997)
[hereinafter 'Obadina'].
107 As noted earlier, Section 40 (1) of the new UK Act (following the 1989 Amendment)
does do away with the constructive notice rule to some extent (while dealing with
directors and persons authorized by them. But several difficulties remain nonetheless.
See, Davies and Rickford, supra note 3, at 59. With respect to other agents, however, the
constructive knowledge rule remains in existence.
 Mihir Naniwadekar ECFR 3/2008

law on the point has been discussed. I have then seen the applications of the
indoor management rule and the exceptions thereto.
Particularly, the exception of "unusual" transactions - which flows from the
alignment of the rule with the ostensible authority of the agent - and the
exception of "fraud" have been investigated. The position with respect to
fraud is unsatisfactory - there are contradictory decisions which cannot be
reconciled easily, and a jurisprudential basis for the position is difficult to find.
It is my submission that cases which purportedly come under this exception
should in fact be decided on the basis of authority. This approach, which has
been discussed in greater detail, offers the soundest theoretical foundation to
solve the peculiar difficulties posed by complex factual scenarios. It would
seem that this area is fertile ground for legislative clarification.
In conclusion, it is submitted that the law in some of the areas discussed in this
paper appears hazy. While every attempt has been made to reconcile decisions
which at first glance appear irreconcilable, those attempts have not been
successful in all situations. In certain areas, the law remains unclear. In such
cases, this essay has sought to point out what the correct application of the law
- on the basis of practical as well as doctrinal grounds - would involve. While
the UK Companies Act, 2006 does take some steps to counter some of the
difficulties noticed in this paper - with respect to the ultra vires doctrine and
(to a limited extent) the constructive knowledge doctrine - difficulties still
continue to exist in the proper application of the indoor management rule. The
British Parliament - it is submitted - missed an excellent opportunity to either
do away with the constructive knowledge rule in its entirety, or to restate the
law in relation to constructive knowledge and indoor management. Countries
considering the adoption of a new Companies Act, such as India, would be in a
better position if they consider not just the British Act, but also seek to restate
the legal position on a logical and comprehensible basis. °8 Statutorily
reformulating the indoor management rule and allied concepts appears to be
desirable from the point of view of businessmen - by achieving certainty in the
law; as well as from the point of view of the Courts - which will not have to
attempt to reconcile irreconcilables.

108 See generally, for possible formulations of a statutory indoor management rule,
Obadina, supra note 106. The discussion concentrates on legislative developments in
Ghana's Draft Companies Code prepared by Professor Gower; and includes a
discussion of the statutory position in several common-law jurisdictions.