HI6027 Business and Corporate Law: Turquand Rule Case Study Analysis

This case study delves into the Doctrine of Indoor Management, also known as the Turquand Rule, and its application within the context of the Corporations Act 2001, specifically referencing Sections 125 and 126. The central issue revolves around whether a bank is entitled to a remedy in a given scenario, examining the implications of a loan taken by a company. The analysis considers whether the outcome would differ if the loan was for different purposes or if the bank's loan officer possessed specific knowledge about internal company affairs. The case study applies the Turquand Rule, which protects third parties dealing with a company, and considers the roles of agents and the objectives of the company. The conclusion supports the bank's entitlement to recover the loan, emphasizing that the bank is shielded by the Doctrine of Indoor Management and the variation in the objective of the company. References to relevant legal precedents, including Royal British Bank vs. Turquand and Mahony vs. East Holyford Mining Co., along with supporting academic sources, are provided to support the analysis.

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CASE STUDY
The case study deals with the doctrine of Indoor
Management or Turquand Rule, Section 125
and 126 of the Corporations Act 2001.

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The issue in the case is whether:
 The Bank would be entitled for the remedy in the case.
 The Bank would ideally be entitled for the remedy in the
case.
 The outcome would have been different if:
i. The loan was for refurbishment of two of Sparkling’
clothing shops.
ii. The bank’s loan officer knew Sarah had fallen out of
favour with the Board and was negotiating a new job.
Issues

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 Also called the Turquand Rule
 It was established in the decision of Royal British Bank vs.
Turquand (1856) 6 E&B 327.
 Company’s indoor affairs meaning that such affairs are company’s
internal matters and hence, belong to the governance issues of the
company (Seely 2018). There is no third party interest involved in
such affairs.
 Exception to the general rule of constructive notice (Maloka 2017).
 Further applied in Mahony vs. East Holyford Mining Co. (1875)
LR 7 HL 869.
DOCTRINE OF INDOOR MANAGEMENT

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 (1): If a company has a codified constitution of its own, then it
may provide for the express restrictions on the members or
directors of the company with respect to the usage of their powers.
 Any right exercised or acted upon shall not become contrary
merely on the ground of constitutional restriction.
 (2): The constitution of the company lays down certain objectives
of the company which, can be diversified by various contracts and
acts of the company.
 Any act of the company which is beyond the objectives as laid
down by the constitution shall not be held contrary merely based
on its objectives.
Section 125 of the Corporation Act
2001.

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 (1): The power of the directors as imbibed in the constitution
may vary, ratify or discharge any terms of a contract in part or
as whole.
 Such an act may be done by the director by the express or
implied authority to such individual to exercising such powers.
 powers may be exercisable with or without the common seal
of the company.
 (2): the viability of the procedure with respect to such contract
shall remain unaffected by the operation of this provision of
law.
Section 126 of the Corporation Act
2001.

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 Bank is exempted from the knowledge of the contractual
settlement and other affairs related to Sarah and the
Company.
 Borrowing loan for the purpose of eucalyptus planting
does not affect the objective of the company which is
clothing.
 Sarah is the agent of the company due to her position
being that of the Managing Director and hence, she has
power to enter into contracts and at the same time, vary or
discharge it.
APPLICATION

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It can be concluded that:
 The Bank would be entitled for the recovery of the loan amount in the
case.
 The Bank would ideally be entitled for the recovery of the loan amount in
the case.
 The outcome would not have been different if:
i. The loan was for refurbishment of two of Sparkling’ clothing shops
because the variation in object does not affect the contract entered by the
parties.
ii. The bank’s loan officer knew Sarah had fallen out of favor with the
Board and was negotiating a new job, because the Bank is protected by
the application of Doctrine of Indoor Management or Turquand Rule.
CONCLUSION

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 Royal British Bank vs. Turquand (1856) 6 E&B 327
 Mahony vs. East Holyford Mining Co. (1875) LR 7 HL 869
 Maloka, Tumo Charles. "The Turquand rule, irregular
appointments and bypassing the disciplinary process." SA
Mercantile Law Journal 29, no. 3, 2017: 527-542.
 Seely, Tania Mila. "The protection afforded to third parties when
contracting with companies: An analysis of the Turquand Rule
and the Doctrine of Constructive Notice." PhD diss., University
of Pretoria, 2018.of the Turquand Rule and the Doctrine of
Constructive Notice." PhD diss., University of Pretoria, 2018.
REFERENCES

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