Discuss in details the rule and exceptions in Royal British Bank V. Turguard.

Royal British Bank V. Turguant

• This is the indoor management rule. It is concerned with the liability of a company for acts of its officers.

• It answers two questions;
1) Can a company escape liability by pleading an internal irregularity
2) Are third parties who deal with the company bound to satisfy themselves that the rules of Internal Management have been complied with.
• These questions were answered in the negative in Royal British Bank V. Turguand (1856).

The articles of the company provided that directors could borrow on board such monies as were authorized by an ordinary resolution of members in general meeting. Directors of the company borrowed from the plaintiff bank without any resolution. In liquidator who denied liability on the ground that the borrowing was irregular. However, it was held that eh company was liable. The court formulated the so called in door management rule: that a person who contracts and deals with a company in good faith is entitled to assume that it is acting within its constitutional powers. He is entitled to assume that what appears regular is in fact regular. He is entitled to assume that officers of the company who are held out by the company as particular sort of officers, are the officers of the company concerned.

• In Mahony V. Easthlyford Mining Co. Lord Harthery says, “Where there are persons conducting the affairs of the company in a manner which appears to be perfectly in consonance with the articles of association, then those dealing with them externally are not affected any irregularities which may take place in the internal management of the company”.

• In Freeman and Lockyear V. Backhurst Parker Properties (Freeman‟s case) the company‟s articles created the position of managing director.

At the material time, non had been appointed. However, one director with knowledge of the others purported to act as managing director. He engaged the plaintiff a firm of

architects to work for the company. The Plaintiff was not paid for services rendered and sued the company. The company denied liability on the ground that the director was not its managing director and hence had no authority. It was held that the company was liable since it represented this director as its managing director who therefore had apparent authority to bind it.

• The indoor management rule protects third parties against the company in case of internal irregularities. It is justified on two grounds;

1) It is fair to third parties to prevent the company from denying liability by relying on an Internal Irregularity.

2) It facilitates commercial transactions in that third parties are not bound to inquire whether the rules of internal management have been complied with.

• However, the indoor management rule does not protect the third partying certain circumstances and the company may escape liability. These are the exceptions to the rule in Turguants case:

1) Public documents of the Company:
If the defect or irregularity would have been ascertained by an inspection, of the company‟s public documents which the third party did not do, he is not protected by therule. It was so held in Irvine V. Union Bank of Australia. This is because, the public documents are registrable and open for inspection e.g. special resolutions.

2) Knowledge of the Irregularity:
If the third party is aware of the irregularity or lack of authority, on the part of the officer dealt with, he is not deemed to be acting in good faith and cannot rely on the indoor management rule. It was so held in B Liggetts (Liverpool) Ltd V. BarclaysBank Ltdwhere the defendant was aware of the irregularity.

3) Suspicion:
If the circumstances are such that they put the third party on inquiry, but the party does not inquire to ascertain the true position, he is not protected by the rule as a reasonable third party would have enquired. It was so held in B. Liggetts (Liverpool) Ltd V. Barclays Bank Ltd.

4) Abuse of power by an officer:
If the officer dealt with by the third party purports to exercise powers not ordinarily exercised by that sort of officer and the third party does not inquire, it cannot rely on this rule.

5) Forged Documents:
The indoor management rule cannot protect a third party or hold the company liable if the document relied upon forgery. Such a document is a legal nullity. It was held in Reuben V. Great Fingall Consolidated:

6) Insiders;
As a general rule, the Indoor Management rule cannot be relied upon by an Insider. These are persons who by virtue of their positions regulations have been complied with
e.g. directors. It was so held in Howard V. Patent Ivory Manufacturing Company Ltd. Where the third parties in question were directors. It was held that hey were deemed to know of the irregularities and could not rely on the indoor management rule.

Question has arisen as to whether directors are insiders. It all depends on the nature of character of the transaction. If it is so closely interwoven with the position of the director as a director of the company, he is deemed to know the circumstances affecting it and is therefore deemed to be an inside. If it is not closely intertwined with his position as director, he may rely on the indoor management rule.

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