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BRIEF ANALYSIS OF TURQUAND RULE AND ITS EXCEPTIONS COMMITTED BY: RAMAN GOYAL & RITURAJ DERHGAWEN
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BRIEF ANALYSIS OF TURQUAND RULE AND ITS EXCEPTIONS
COMMITTED
BY: RAMAN GOYAL &
RITURAJ DERHGAWEN,
ENROLMENT
NO.: A3221521129, A3221521115
COURSE: BBA LL.B. (HONS.) 2021-26
INDEX
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Sr. No.
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Title
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Page No.
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1.
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Introduction
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1
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2.
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Background
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2-5
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3.
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Doctrine of Constructive
Notice
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6-9
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4.
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The Constructive Notice Doctrine
in the
Companies Act of 2013
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10-12
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5.
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Conclusion
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13
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INTRODUCTION
As you are known, when an outsider deals with a corporate entity of a firm, they must check through incorporation documents such the company's memorandum of agreement
and articles of association. They are not
required to inquire about the
company's internal management. He
doesn't have to confirm beforehand that the entity has complied with all legal
requirements, that the corporation's representative has the necessary capacity
and has been given permission by the company's governing
body, etc. When he signs a contract
with the company,
he assumes that the person he is dealing
with has the right
authority and is working in accordance with the applicable laws as well as the MOA
and AOA of the corporation.
Common law serves as the foundation for the Turquand
rule. It protects
legitimate third parties who are ignorant of any corporate
irregularities that could jeopardize the legality of a transaction or contract
with the business. The "Indoor Management rule" is a frequent term
used to describe the Turquand
rule. When a business engages
in transactions with other parties, it is its responsibility to make
sure that all internal policies derived from its AOA and Memorandum of
Association have been followed. The Turquand rule exempts third parties from
having to find out if the business they plan to do business with has followed
all of its internal policies. It protects legitimate third parties from being
harmed by the company's inability to adhere to internal policies.
We
will talk about a well-known case that established "The Turquand Rule".
A person dealing with a corporation needed only look at
the Memorandum of Association and the Articles of Association to know
the extent of the authority and does not need to ask as to whether the internal
procedures are regular. This was established in the well-known case of Royal
British Bank v. Turquand.[1]
Prior to this judgment there
are several rules
for protecting the person dealing
with the company and most of the rules were almost
entirely common law rule.
1.
Name of the Case Royal British Bank v. Turquand
2.
Citation 6
E&B 327, All ER 435 5
3.
Year of the Case 1 May 1856
BACKGROUND
Submitted to the Registrar of Companies is the company's
Memorandum of Association. Since those doing business with the company are allowed to
review the document to see whether there are any restrictions on their
authority or ability to conduct business, it is available for public viewing.
It caused an issue by assuming that third parties would be aware of any
restrictions imposed on the company's management. Consequently, it considers outsiders doing business with the Company to be aware
of any irregularity that may subsequently be discovered
within the Company regarding any decision.
Royal British Bank v. Turquand
FACTS
1.
They appointed Turquand as the official
manager to liquidate the insolvent 'Cameron's Coalbrook Steam, Coal, and
Swansea and London Railway Company'. This company was incorporated under the
Joint Stock Companies Act of 1844.
2.
The company had issued a bond of £2000
to the Royal British Bank, which secured the company's drawings on its current account. The bond
was under the seal of the company, signed by two directors and the
secretary.
3.
The plaintiffs, the Royal British
Bank, for the non-payment
of the same sued him.
4.
The company claimed that, under its
registered deed of settlement (the articles of association), the directors
had only the power to borrow the company's resolution had allowed what.
5.
The defendants also pleaded that it had
adopted no such resolution allowing the making of the bond and that they give any such bond without
the authority and consent of the shareholders of the company.
ISSUE
Whether
the company is liable for the loan?
JUDGMENT
1 Sir Jervis was of the opinion that the judgment of the
Court of Queen's Bench should be upheld. He was inclined to believe that the question,
which was mainly raised both in this case and in that Court,
does not necessarily arise and does not need to be decided. His impression is that the resolution set out in the
replication goes far enough to
satisfy the requirements of the deed of settlement.
2.
According to Sir Jervis, the deed allows
directors to borrow on a bond the sum or sums of money which may be borrowed from time to time by a resolution passed at the General Meeting of the Company and the
replication of the resolution, adopted at the General Meeting, authorizes the
directors to borrow such sums on bonds for such periods and at such interest
rates as they may deem expedient, in accordance with the act of settlement and
the Act of Parliament; but the resolution does not otherwise define the amount
to be borrowed.
3.
Sir John Jervis CJ contended that it
seems to me to be enough. If this is
the case, the other question does not
arise, we do not need to decide; for it seems to us that the plea, whether we consider it to be a confession and a
refusal or a special Non-est factum, does not raise any objection to that
advance as against the Company.
4.
He further said that – we can now take
for granted that dealings with these companies are not like dealings with other
partnerships and that the parties dealing with them are bound to read the
statute and the act of settlement. But they're not bound to do more than that. And the
party here, reading the act of settlement, would find, not the prohibition of borrowing, but the
permission to do so under certain conditions. In finding that the authority could be completed by a resolution, it would have the right to infer the fact of a resolution authorizing what appears to have
been legitimately done in the face of the document.
CONCEPTS HIGHLIGHTED
1.
According to the Turquand rule, any
outsider who enters into contracts with a company in good faith is entitled to
assume that the internal requirements and procedures have been complied with.
Consequently, the company will be bound by the contract even if the internal requirements and procedures
have not been complied with.
2.
One cannot
claim under the doctrine of the indoor management
if the outsider is aware that the internal requirements and procedures have not been complied with; or if the circumstances under which the contract
was concluded on behalf of the company are suspicious.
However, it is sometimes possible
for an outsider to determine whether an internal
requirement or procedure has
been complied with. If this can be
ascertained from the public
documents of the company, the doctrine of disclosure
and the doctrine of the constructive
notice shall apply and not the indoor
management rule.
KEY TAKEAWAYS FROM ABOVE DECISION
1.
The Turquand rule clarifies the
underlying fundamental principle that, when an outsider enters into a contract
with a company in good faith, the outsider can presume that no such
irregularities exist and that, as a result, all procedural requirements have
been complied with by the company appropriately.
2.
When
examined in the light of cases, Turquand rule it can be inferred that the rule does not
function in an entirely unrestricted manner.
This Doctrine of Indoor Management is a long-standing
idea that was created more than 150 years ago in the context of the
"Doctrine of Constructive Notice" and has since come to be known as
the "Turquand's Rule."[2]
As a concept, the Doctrine of Indoor Management clarifies
the underlying fundamental principle that, when an outsider
enters into a contract with a company
in good faith,
the outsider can presume that
no such irregularities exist and that, as a result, all procedural requirements
have been complied with by the company
appropriately. The government authorities are
included within the scope of this doctrine
even though it is necessary for outsiders to be informed about understanding of
the structure of the specific company's Memorandum and Articles of Association
in order to seek redress.
PLEASE NOTE THAT:
The common law, Turquand rule only serves
as protection to third parties
acting in good faith. This means that a third party
who knew or even suspects
that internal formalities have not been complied with but deliberately turns
a blind eye will not be protected.
The statutory interpretation of the Turquand
rule extends to people who ought to have reasonably known that the company had not complied
with its internal
formalities. A third
party may be put on an inquiry judging from the nature of the transaction, which includes an unusual
or suspicious transaction.
There must be absence
of circumstances that put the third party on an inquiry.
In addition, the Turquand rule does
not protect a third party who relies
on a forged document.
The Turquand rule needs to be applied
carefully since it may be interpreted in terms of common
law and statutory law.
DOCTRINE OF CONSTRUCTIVE NOTICE
Knowing the
specific facts that a court assigns to a party is known as constructive notice.
Constructive notice is based on the legal presumption that someone should have
known something as if they truly do. A man of ordinary caution will be presumed
to have known a specific fact about the transfer transaction if the
circumstances suggest that he should have known it. This warning is operational
as a legal provision. The court maintained that "constructive notice
is itself evidence
of notice" in the well-known Plumb v. Fluitt
[1791] case. No one will be
permitted by the court to refute it. Wigram V C
determined the cases of constructive notice into 2 classes in the case of Jones
V Smith [1841] namely:
1.
Cases
in which the party alleged
has had actual notice regarding the fact that the property
in dispute is somehow affected;
2. Cases in which the court has been persuaded from evidence on record before
it that the party alleged has
restrain himself from inquiring to avoid the notice.
WHAT ARE THE
ESSENTIAL CONDITIONS FOR CONSTRUCTIVE NOTICE?
In respect
of registered transaction, the followings are the essential conditions for constructive notice:
1. The instrument has to be registered in consonance with the Registration Act, 1908.
2.
The instrument has to be duly entered
or filed in books kept under section
51 of the Registration Act, 1908.
3.
The particulars pertaining to the transaction to which the instrument relates
have to be correctly entered in the indexes kept
under section 55 of the Registration Act, 1908.
LEGAL PRESUMPTION OF CONSTRUCTIVE NOTICE
In the following
circumstances the legal presumption of constructive notice
arises
1. Willful abstention from an inquiry
or search;
2. Gross negligence;
3. Document compulsorily registrable;
4. Actual possession;
5. Notice to an
agent.
1. WILLFUL ABSTENTION FROM AN INQUIRY
OR SEARCH
A person has notice if it
was his responsibility to make an enquiry
of if there was something to put him on an enquiry which if he
pursued, he would have learnt the truth. The words 'will abstention from an
inquiry or search' in section 3 means an abstention from inquiry or search as
would show want of bonafides and a mere omission to make inquiries cannot be
regarded as sufficient to constitute constructive notice within the meaning of the section. Illustration: A sells property to
B. A got the property by partition and presumption right was reserved in the
partition deed. It is B's duty to check the partition deed before purchasing
the property, if he abstains himself from enquiring about the partition deed to
avoid competition then it is a wilful abstention.
2. GROSS NEGLIGENCE
Gross
negligence does not mean mere carelessness, it is a degree of negligence so gross in nature that a
court of law may
treat it as a proof of fraud.
If there exists mental indifference to obvious risks, then it is a gross
carelessness or negligence. What would be gross negligence in one case would not be so in another.
It all depends on the man's knowledge and the means of
information which lay to his hand. The main difference between wilful
abstention and gross negligence is that in latter the intention is not wrong or
fraudulent.
Illustration: X purchases
a property within
the municipality. X did not check whether
any municipal taxes pertaining to the property were in arrears. As X
failed to check before purchasing it amount to gross negligence.
3. REGISTRATION AS NOTICE
Registration is considered as constructive notice when
the document is compulsorily registrable. The amending act of 1929 made it clear that registration of an instrument relating to immovable
property amounts to notice of the instrument from the date of registration.
Registration is notice
only in the following circumstances:
i)
When the instrument is required by law to be registered;
ii)
Registration is notice to a subsequent transferee. Prior transferee is not affected by notice
of subsequent transactions from the registration of the same;
iii)
The instrument
must have been registered in the manner
prescribed by the Registration
Act, 1908.
4. POSSESSION AS NOTICE
If someone possesses an immovable property, then the
purchaser must know that someone is exercising right to possession and
enjoyment on that property. In other words, the person dealing with any immovable property
shall be deemed to have notice of the title of any person who, temporarily is in actual possession thereof. The possession must be actual. Illustration: A sells his property to B and then A requested
B to let him live in the property as long as A finds a new
place to live. Registration was not
done. A sells the same property to C. As B's possession is not actual so it is not a constructive notice to C.
5. NOTICE TO AGENT
The general principle
is that a person has notice of fact when information of the fact is given to or obtained by his agent. The knowledge of
the agent is regarded the knowledge of the principal. This general principle
has certain limitations.
Notice to agent is notice to principal in the following circumstances:
a.
The agent must have actual knowledge of a fact.
b.
The agent must have obtained
the knowledge during
agency.
c.
The agent must have appointed
for particular transaction or business.
d.
The knowledge of fact must be material
to that particular transaction or business.
e.
The agent must obtain the knowledge in a good faith as a reasonable prudent
man.
EXCEPTIONS TO THE PRINCIPLE
i)
If the
agent fraudulently conceals
a knowledge of fact with wrongful intention, then his knowledge will not amount to
principal's knowledge.
ii)
If there is a third party who is
involved with agent in the fraud and the third party knows that agent conceals the fact with a wrongful intention then agent's knowledge will not amount to principal's knowledge.
THE CONSTRUCTIVE NOTICE DOCTRINE IN THE COMPANIES ACT OF 2013
The Doctrine of Constructive
Notice is the legal concept of presumption of knowledge of that certain subject or information. A
business is a separate legal entity that can be formed by a group of persons to
profitably carry out economic operations. The company's formation and operation
are governed by a set of laws, rules, and regulations. The objective of
establishing such regulations is to protect both the company and its
management, as well as any outsiders who have a contractual relationship with the company. A set of rules and
principles have been
established to safeguard the company from outsiders and the other way around.
Companies make money by utilizing the resources of the country.
As a result, companies play a critical role in economic growth,
necessitating the establishment of laws governing them. These rules function as
a disincentive to unethical and unfair commercial practices.
THE CONSTRUCTIVE NOTICE
DOCTRINE
The concept of Constructive Notice
is one of the most important ideas
we meet when studying Company Law. The theory of
Constructive Notice means that the AOA is well-known by an outsider who wishes
to hold any contact with the firm shortly since the AOA is a public document
and is available to everyone u/s 399 of the Companies Act, 2013.
From the time
the business is registered, the AOA and MOA are considered "public
papers." They are open to the general public for viewing. As a result, it is believed that everyone
who interacts with the company is familiar with its policies and procedures.
The Doctrine of Constructive Notice is the name given to this assumption.[3]
The rule of constructive notice applies not only to MOAs
and AOAs but also to all other documents that must be filed with the Registrar
of Companies, such as Section 117 special decisions. The theory of constructive
notice, on the other hand, does not
apply to papers filed with the
registrar of companies only to preserve records.
The notion,
according to Palmer, only applies
to papers that influence the company's rights.
Constructive responsibility is a concept that
attempts to simplify business rules. It protects businesses from outsiders
when they interact with them. Nonetheless, this regulation was seen
to cause more harm than benefit, lowering
its credibility. When the rule in dispute is internal, the courts
established the idea of indoor
management to limit the application of this provision.
This English term was originally only used in cases of fraud, but it rapidly
expanded to include cases of extreme carelessness.
EFFECTS
OF THE DOCTRINE OF CONSTRUCTIVE NOTICE
According to the Constructive Notice
thesis, it is the outsider, he’s responsible for knowing the papers that govern the company. He
should be well-versed in all legal papers before signing any deal with the
firm. It is also the responsibility of the third party to comprehend the real
meaning of the provision and conditions included therein. According to the
idea, corporate bodies are preferred.
The Madras High Court disputed the scope of constructive
responsibility in the case of KotlaVenkataswamy vs. Rammurthy, AIR 1934 Mad
579. The question, in this case, was whether the mortgage bonds were issued
lawfully in line with the company's AOA, therefore rendering the business
liable.
All deeds,
checks, certificates, and other papers must be signed on behalf of the Company by the Managing Director, the
Secretary, and the Working Director before they are recognized valid, according
to Article 15 of the Company's AOA.
The plaintiff accepted
a mortgage deed signed by only the
secretary and an executive director in this case.
According to the court, the plaintiff cannot bring a claim under this deed. The
Court went on to say that if the plaintiff
had read the articles, they would have seen that a deed to
carry out the job required
by the firm's three authorized officials was badly signed, and they would not have accepted such a deed.
Even though she may
have acted in good faith and that her funds
were used for the company's advantage, the bond is void.
Nonetheless, the court later developed a principle in Royal British Bank v. Turquand
(1856) 6 E&B 327, holding that, while the third party
should have notice of all the contents
of the MOA & AOA, they are not required to scrutinize internal
matters and see whether the corporation followed all internal procedures.
THE DOCTRINE OF INDOOR MANAGEMENT IS AN
EXCEPTION TO THE DOCTRINE OF CONSTRUCTIVE NOTICE
The theory of constructive notice is an
exception to the principle of indoor management, and it's important
to note that it doesn't
allow outsiders to have access to or notice of the company's internal actions. As a result, if an act is allowed
by an MOA or AOA, an outsider might assume that all formalities
are followed in carrying out the
act, which is known as the Turquand
Rule or the Doctrine of Indoor Management.
This is based on The Royal British Bank vs. Turquand
(1856), 6 E&B 327, a landmark case. The notion of indoor management
asserts, in layman's terms, that the company's indoor concerns are its
responsibility. As a result, those who engage with a company through its
directors or other persons must understand this indoor management idea. They
might assume that the members of the firm are acting or carrying out their
tasks within the scope of their stated authorization. As a result, if an act authorized by the Articles is carried out in a certain
way, outsiders working with the company may conclude that the director or other
authorities acted on their behalf.
CONCLUSION
The rule's main point is that people doing business with
limited liability companies are not required
to inquire about their indoor
management and won't
be impacted by irregularities they were unaware of. It is a requirement
of the rule that a third party cannot enforce a transaction
if the company could not have engaged into it lawfully under the conditions.
The rule only provided protection for "outsiders," or those doing
business with the company "externally."
It should be remembered that, while dealing with a
company one should at least check the Charter /MOA & AOA of the company and other information related
to concern available on various forums. You should check the position and
authority of person dealing with you on behalf
of company, you have to check resolution/authorisation letter/Board Resolution and the authority to which extent the person
has power to deal with you on behalf of the company. Please note that ignorance
is not a remedy, it will affect you badly, when you know there is something
fishy or you have knowledge the internal management of the company or that the
person dealing with you do not have proper authority, then you will not claim benefits of above
rule.[4]
[1]
Available at: https://www.caclubindia.com/articles/analysis-of-turquand-rule-and-its-exceptions-47933.asp
[2]
Available at: https://www.lawyersclubindia.com/articles/an-analysis-of-the-turquand-rule-and-its-exceptions- 15237.asp
[3]
Available at: https://www.fasken.com/en/knowledge/2022/08/10-the-turquand-rule-and-litigation-in- courts#:~:text=A%20further%20exception%20to%20the,or%20transaction%20that%20is%20void
[4] Sealy, L. S. (1990).
Agency Principles and the Rule in
Turquand’s Case. The Cambridge Law Journal,
49(3), 406–408. doi:10.1017/S000819730012224X
Article Information
BRIEF ANALYSIS OF TURQUAND RULE AND ITS EXCEPTIONS COMMITTED BY: RAMAN GOYAL & RITURAJ DERHGAWEN
Authors: RAMAN GOYAL, RITURAJ DERHGAWEN
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/06/17
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International Journal for Legal Research and Analysis
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