Royal British Bank v Turquand

Facts

• The company's deed of settlement (equivalent to articles) required a resolution of shareholders to authorise borrowing.
• The directors borrowed money from the Royal British Bank without obtaining the required resolution.
• Turquand (the company's liquidator) argued the borrowing was unauthorised and the bond void.

Issue

1. Whether an outsider dealing with a company is bound to inquire into whether internal formalities (such as a shareholder resolution) have been properly complied with.

Held

• Jervis CJ held that the bank was entitled to rely on the bond. Outsiders dealing with a company are entitled to assume that internal regulations have been duly observed. The requirement of a resolution was an internal matter; the bank was not bound to inquire whether one had in fact been passed.

Ratio Decidendi

Persons dealing with a company in good faith are entitled to presume that all matters of internal management and procedure have been regularly performed. They are not required to inquire into the indoor affairs of the company to verify that internal formalities have been observed. This rule (the "Turquand rule" or "doctrine of indoor management") operates as a counterbalance to the doctrine of constructive notice, protecting outsiders from the company's own internal failures.