This case focus around the power of directors in a joint stock company and introduced the concept of indoor management
Citation: [1856] 6 E&B 327
Court: Court of Appeal
Date of Judgement: 1st May, 1856
Bench: John Jervis (CJ), Knight Bruce (J)
Facts
- The Royal British Bank, as the plaintiff, brought a lawsuit against Turquand, who acted as the liquidator of Cameron’s Coalbrook Steam, Coal and Swansea and Loughor Railway Company,[1] the defendant, seeking repayment of a bond issued by the company prior to its insolvency.
- Allegations were made that on March 6th, 1850, the company issued a £2000 bond to the plaintiff to secure the company’s drawings on its current account. This bond was signed by two directors and the secretary, with the company’s seal affixed.
- In response to the lawsuit for default on bond repayment, the company argued that the bond was issued without proper authorization from the shareholders, thus the company disavowed recognition of the bond and deemed itself not liable for its repayment.
- The Court of Queen’s Bench upheld the plaintiff’s claim, leading to an appeal by the defendant.
Judgement
The doctrine of indoor management was established in this case. The court held that a bona fide third party, like Turquand, was entitled to presume the regularity of internal company procedures. Consequently, Turquand could enforce the bonds despite the absence of a formally authorized resolution.
Key legal issues discussed
- Can a company be held liable for the loans secured by its directors?
Yes
The Court established that parties contracting with a company have a duty to familiarize themselves with the governing statute and the company’s internal rules (deed of settlement). However, their inquiry need not extend beyond these documents. In this case, upon reviewing the deed of settlement, the appellant would have ascertained the company’s authority to issue bonds under specific conditions. The subsequent resolution served as a representation that these conditions had been met, allowing the appellant a reasonable presumption of the bond’s validity. Turquand was allowed to believe that the resolution had been lawfully enacted, thus it was decided that he could sue on the bonds even though they had not been authorized by a resolution. It was noted that a person engaging with a company regularly has the right to assume that the necessary compliance or delegation of authority to the officers acting on behalf of the company has been established. It was further emphasized that beyond what is evident from the situation, no further inquiries need to be raised. Court referred to the concept of indoor management to support this perspective, stating that outsiders are obligated to be aware of the external position of the company but not its internal management. Since Turquand was entitled to presume that the required decision of the company in its general meeting to approve the issuance of bonds had been made, the Court concluded that the Royal British Bank was liable for the bonds. Turquand’s sole responsibility was to ensure that the transaction complied with the company’s Articles. If the company fails to follow the internal procedures necessary to execute the transaction, it will be held accountable. Turquand was not obligated to ascertain whether the resolution had been adopted; thus, he could file a lawsuit against the company based on the bond, and additionally, the company was bound by the bond.
[1] Joint Stock Companies Act 1844 (7 & 8 Vict. c. 110)
