- Royal British Bank v Turquand
"Royal British Bank v Turquand" (1856) 6 E&B 327, and the eponymous "Rule in "Turquand's Case" refer to the rule of
English lawthat a third party dealing with a companyis entitled to presume that a person held out by the company has the necessary authority to act on behalf of the company.
common lawrule mitigated the perceived harshness of the doctrine of constructive noticewith respect to the "public documents" of a company (including its Memorandum of Associationand Articles of Association).
In "Turquand" the articles provided that the company could borrow on bonds such sums as from time to time authorised by a resolution passed in
general meeting. The court held that a third party bondholder "finding that the authority might be made complete by a resolution ... would have a right to infer the fact of a resolution authorising that which on the face of the document appeared to be legitimately done."
In fact, the rule was not accepted as being firmly entrenched in law until it was endorsed by the House of Lords in "Mahoney v East Holyford Mining Co." (1875) LR 7 HL 869.
In "Mahoney" Lord Hatherly phrased the law thus:
:"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 place in the internal management of the company.
So, in "Mahoney", where the company's articles provided that
cheques should be signed by any two of the three named directors and by the secretary, the fact that the directors who had signed the cheques had never been properly appointed was held to be a matter of internal management, and the third parties who received those cheques were entitled to presume that the directors had been properly appointed, and cash the cheques.
The position in English law is now superseded by section 35A of the
Companies Act 1985, but the Rule in "Turquand's Case" is still applied throughout many common law jurisdictions in the Commonwealth.
According to the "Turquand rule", each outsider
contracting with a company in good faithis entitled to assume that the internal requirements and procedures have been complied with.
The company will consequently be bound by the contract even if the internal requirements and procedures have not been complied with. The exceptions here are: if the outsider was aware of the fact that the internal requirements and procedures have not been complied with (acted in bad faith); or if the circumstances under which the contract was concluded on behalf of the company were suspicious.
However, it is sometimes possible for an outsider to ascertain whether an internal requirement or procedure has been complied with. If it is possible to ascertain this fact from the company's public documents, the doctrine of disclosure and the doctrine of constructive notice will apply and not the Turquand rule. The Turquand rule was formulated to keep an outsider's duty to inquire into the affairs of a company within reasonable bounds, but if the compliance or noncompliance with an internal requirement can be ascertained from the company's public documents, the doctrine of disclosure and the doctrine of constructive notice will apply. If it is an internal requirement that a certain act should be approved by special resolution, the Turquand rule will therefore not apply in relation to that specific act, since a special resolution is registered with
Companies House(in the United Kingdom), and is deemed to be public information.
United Kingdom company law
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