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  • Isha Khurana

Evaluating the Turquand Rule and its Exceptions in Common Law

[Isha is a student at Jindal Global Law School.]

The Turquand rule, or alternatively, the doctrine of indoor management, offers protection to third parties while dealing with companies by allowing them to assume due compliance with the company’s internal regulations.[1] A company, therefore, cannot claim that the acts carried out by its officers were unauthorized and avoid liability. One could say that this doctrine gives people outside of a company unchecked and arbitrary powers. However, through case laws and jurisprudence, courts across different nations have developed certain exceptions for the exercise of this doctrine. These exceptions must be looked at as limitations to the arbitrary use of the doctrine that facilitate its optimum usage. For proving the same, this article highlights how the use of such exceptions serves the purpose of law and justice by preventing third parties from misusing the doctrine to support their wrongful gains or negligent acts. This article accordingly looks at the doctrine’s existence in various jurisdictions, analyses the development of its exceptions, while highlighting its continuing relevance in present-day company matters.

Analyzing the Presence of Exceptions in Foreign Jurisdictions

Originating from English law, the doctrine has established itself in other common law jurisdictions such as India, Malaysia, and Australia. Raja Bahadur v. The Tricumdas Mills Company Limited, was one of the first cases in India to discuss this doctrine, followed by Lakshmi Ratan Cotton Mills v. JK Jute Mills Company. Here, the doctrine was applied positively to look after the third party interests. The courts stated that third parties who are dealing with companies cannot reasonably be expected to check the legality, propriety, and regularity of the acts of directors or their internal mechanisms.

This reasoning has found itself in Australian jurisprudence as established in Dey v. Pullinger Engg Co.[2] that the wheels of business would not run smoothly if the onus was consistently placed on outsiders to look into a company’s internal mechanisms and ensure that everything is functioning as planned. Stating the obvious, if the company itself is making representations that a person is authorised to carry out regular acts, and an outsider has fulfilled his duties of looking into the documents available to him, the liability should fall on the company as the outsider has made rightful presumptions of regularity.

Nevertheless, the doctrine’s applicability also depends on rightful conduct by outsiders. Malaysian courts have stated that the law imposes a minimum duty upon outsiders to perform necessary checks and due enquiry as may be required. Following this reasoning, courts have devised exceptions such as the due enquiry exception, forgery, and knowledge or suspicion of irregularity. Even a cursory reading of the exceptions would indicate that if any of the said situations were to exist, it would be arbitrary to impose liability on a company. I would say that the exceptions to the doctrine, by putting both parties on an equal footing and balancing their rights and responsibilities, ironically make the doctrine applicable.

Taking the case of Devi Mal v. Standard Bank of India,[3] the third party here certainly knew that the director was disqualified from performing his regular duties. In these scenarios, it would be unfair to allow such an outsider, who was ignorant in his conduct and possessed knowledge of irregularities, to take advantage of the rule. Additionally, allowing parties to seek protection under irregularities that they were unaware about, due to their own fault, was also held to be against the spirit of the doctrine. For instance, if it is reflected in the company’s documents such as memorandum and articles of association that certain power has not been conferred upon a party, and they fail to make note of such matter, the irregularities arising out of such failure, are due to their own fault and cannot form a ground of defence. This understanding, coupled with that of the doctrine of constructive notice, provides a well-rounded image of the expectations and duties of a third party. At this juncture, it must be mentioned that the doctrine of constructive notice poses itself as a counter doctrine that places the onus on the third party to investigate the public documents of the company and take note of any irregularities they notice to ensure obedience and conformity with the internal regulations.

It must also be noted that these exceptions to the doctrine’s applicability are not limited to India. Jurisprudence on this matter in foreign jurisdictions has also aided developments. Hence, studying these exceptions provides a more holistic picture.

Scope for Improvement in Indian Jurisprudence

In English law, forgery forms another exception, as noted in Ruben v. Great Fingall Consolidated,[4] where a secretary’s unauthorised act and a forged signature could not bind a company to any contract. This was rightly held since allowing an unauthorised person to enter into contracts on behalf of a company and upholding it would expose the company to wrongful liability and false claims. Indian law through Official Liquidator v. Commissioner of Police, upheld the same, since the forged signature of directors was not seen as binding on a company.

English law, in my opinion, has gone a step further and attempted to investigate whether insiders to a company, such as directors, can claim protection under this doctrine. In Morris v. Kanssen, the House of Lords held that since the plaintiff had assumed the duties of a director at the time of the transaction in question and had a duty to ensure consistency with internal requirements, he could not seek protection under this rule. Here, it is put forth that one of the major reasons for allowing outsiders to claim this rule was that if they do not have access to what is happening “behind the doors” of a corporation, they cannot be reasonably expected to know the same. It is thus argued that since directors are themselves a part of the internal workings of a company and have access to the internal regulations, it would only be their negligence and ignorance that would result in an absence of required knowledge, thereby rightly excluding them from this rule’s protection.

Indian law can thus draw inspiration from cases such as Morris v. Kanssen that depict grey areas and perhaps study the role of members within the company itself that might not be privy to certain transactions, leading to further developments in the operation of this doctrine. The exceptions, thus, work to ensure that there is no misuse of this doctrine and are rightfully present to strike a balance between protection of a third party’s interest and proper, non-arbitrary enforcement of contracts against a company.

Arguing for a Concretised Presence of the Doctrine in Company Law

The exceptions observably seek to strike a balance between protection of an outsider’s interest and behaving fairly towards a company and especially its shareholders, who might be unaware of such misconduct. Further, as much as an outsider can use the doctrine as a shield to protect themselves, the company can also rightly use it as a sword. The exceptions show that the doctrine functions as a boomerang, and if an outsider does not act as he is expected to, the company pleads ultra vires or enforces constructive notice against him. One can thus argue that the presence of such exceptions enforces an authentic use of this doctrine and forms an important principle of company law.

Company law across nations is moving towards offering protection and aid to parties who may need it. Within Indian company law itself, minority shareholders are protected by the affirmative rights granted to them in the articles of association of a company by way of entrenchment clauses given in Section 5 of the Companies Act 2013. Through this, the decisions and opinions of minority shareholders are also required to be considered during resolutions, and such shareholders are well within their powers to oppose resolutions as well. A company also aims to protect itself from attempts at takeovers through practices such as liquidation protection rule which prevents withdrawal of shares by individual holders. So, when a company is protected from any takeovers or destruction through such mechanisms, why should this spirit of protection not extend to outsiders as well?

Clearly, the doctrine’s purpose and practical applicability, with its exceptions, only supports the contention that this rule must continue to exist in company matters and hence protect third parties from injustice.

[1] Royal British Bank v. Turquand [(1856) 6 E&B 327]; Paul L. Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (10th edition, Sweet and Maxwell, 2016). [2] Dey v. Pullinger Engg Co. (1921) 1 KB 77, also see Meena Chawla v. Prism Entertainment Private Limited (2011), wherein it was stated that business could not be carried out if a person dealing with a company is required to oversee compliance with their internal mechanisms. [3] Devi Mal v. Standard Bank of India [(1927) 101 I.C. 568]. [4] Ruben v. Great Fingall Consolidated Limited [1906 AC 439].

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