Company Law Assignment: Northside Developments and Indoor Management

This case study analyzes a company law dispute concerning the indoor management rule, specifically examining the case of Northside Developments Pty. Ltd. The registrar general allowed a mortgage, but the appellant contested its validity, alleging improper execution due to the company secretary's lack of authority. The assignment explores the indoor management rule established in The Royal British Bank v. Turquand, which allows third parties to assume internal compliance. It then delves into exceptions to this rule, drawing upon cases like Morris v. Kanssen, E.B.M. Co. Ltd. v. Dominion Bank, and Kreditbank Cassel G.m.b.H. v. Schenkers. The analysis highlights the importance of reasonable inquiry and good faith in transactions. The case concludes that the registrar general should have made further inquiries regarding the company secretary's authority, and the indoor management rule should not apply due to the irregularities. The document thoroughly examines the legal principles, relevant cases, and the application of these principles to the specific facts of the case, ultimately concluding the mortgage was invalid.

Running head: COMPANY LAW
Company law
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Author Note

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Summary
In this case the registrar general (The respondent) had allowed a mortgage pursuant to section
127 of the Real Property Act. However it had been alleged by the appellant in relation to the
transaction that it had not been entered into by the organization NORTHSIDE
DEVELOPMENTS PTY. LTD (The appellant) in a proper manner. According to the
transaction of the company was not able to pay its loans it would have to give away its
property which was held by the company providing the loan as a mortgage. The transaction
has been approved by a person who purported to act as the company secretary of the
company but in reality he was not. In this situation there was alleged knowledge on the part
of the director that there was some kind of discrepancy in relation to the authority of the
company secretary. The person who had purported to be the company secretary of the
company was son of the director of the company. The allegation of the appellant had been
rejected by the lower court based on the fact that the indoor management rule will be
applicable in this situation. However the court of appeal rejected the ruling of the lower court
in favor of the appellant and stated that the indoor management rule in this case would not be
applicable in the light of its exceptions.
Issue
The primary issue in context of this case study is that whether the third party has the
right to rely upon assumptions which can be made in relation to the internal management of
the organization while getting into a contractual transaction.
Rule
The primary rule which is applicable in situation of making an assumption while entering into
a transaction with a company has been provided via the ruling of the land mark case of The

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Royal British Bank v. Turquand (1856) and is famous and commonly known as the ” indoor
management rule”. The provisions of this rules signifies that the any person who gets into a
dealing with a person acting on behalf of the company has the right to assume that the person
has complied with all the internal regulations and requirements of the organization. However
the rule cannot be applied in all circumstances and there have been many situations where the
court have considered that the indoor management rule is not applicable in the provided
circumstances. These cases as and the ruling and reasoning provided by the judges are as
follows.
One of the primary reasoning which had been provided by the court in relation to the
application of the ” indoor management rule” has been given through the case of Morris v.
Kanssen (1946) AC 459. In this case taking into consideration the circumstances it had been
reasoned against the applicability of the indoor management rule that the rule has been
brought to existence for the purpose of addressing the issues which are faced a third party
while getting into a transaction with a company but the application of the rule does not give
power to a person to rely on it in an unreasonable manner. This means that in situation where
a reasonable person would have the idea of making an inquiry due to the suspicion incurred
by him, he has to make that inquiry and cannot merely rely upon the application of this rule.
The inquiry has to be made towards the verification of the authority of the person who is
purporting to act on behalf of the organization.
The circumstances in which an inquiry would have been made by a reasonable person had
been duly discussed in the famous case of E.B.M. Co. Ltd. v. Dominion Bank (1937) 3 All
ER 555. In this case the judge ruled that an inqury has to be made by a reasonable person on
the basis of the very nature of the dealing he is entering into even in circumstances where
such person is in no “special” relationship with the company. These provisions have been

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also successfully discusses and applied in the case of A.L. Underwood Ltd. v. Bank of
Liverpool (1924) 1 KB 775.
The rule had been adjudged to be inapplicable in situation where there was an element of
forgery as duly discussed in the case of Kreditbank Cassel G.m.b.H. v. Schenkers (1927) 1
KB 826. In this particular case the judge had made a ruling that the doctrine of making
assumption can be applied in circumstances which have the element of irregularity which
may have had an impact on the dealing otherwise in a bona fide manner and the application is
strictly prohibited in situation where there is an element of forgery. Another case which such
provisions were applied is the case of Ruben v Great Fingall Consolidated (1906) AC 439.
However there are circumstances in which forgery cannot be utilized as a proper exception to
the Indoor management rule. These have been stated through the case of Uxbridge
Permanent Benefit Building Society v. Pickard (1939) 2 KB 248. Here the court had held
the organization liable even where the agent had indulged into a transaction though fraud.
The point which has to be however noted in relation to this case is that there was no common
seal of the organization which had been used for the purpose of getting into the transaction.
In situation where the very authority or power of the officer acting on behalf of the
organization is subjected to the risk of being delegated under the provisions of the articles of
association the indoor management rule can be applied. The reasoning had been provided by
the judge in Houghton and Co. v. Nothard, Lowe and Wills (1927) 1 KB 246. It was
further added to by the judge while making this ruling that the transaction entered into by the
organization would be binding on a the company even in situation where the officer has acted
beyond the authority provided to him until the third party had the knowledge of such
authority being exceeded or no authority existing or having a reason to make further inquiry.

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The indoor management rule had been held to be subjected under the principles of the law of
agency as ruled in the case of Crabtree-Vickers Pty. Ltd. v. Australian Direct Mail
Advertising and Addressing Co. Pty. Ltd. (1975) 133 CLR 72, in addition the applicability
of the rule depends upon the ostensible or actual authority of a person who purports to act on
the company’s behalf. The transaction in relation to this case had been held as not binding the
organization if it has been prohibited by the constitution. Although the case did not make a
ruling in relation to transaction involving the use of the common seal these provisions are no
longer applicable as per section 124 of the Corporation Act.
Where any director or officer of the organization has been found to negligent in relation to
their duties they cannot uses such negligence as a shield to evade the application of the indoor
management rule. This reasoning in favor of the application of the rule had been given by
Bank of Ireland v. Evans' Trustees (1855) 5 HLC 389 (10 ER 950). In this case the
secretary had committed fraud to enter into a dealing to by using the common seal of the
company. He got access to the seal due to the negligence of the director. The court held that
the dealing is binding on the company.
Application
The issues in relation to the case have already been identified which is the application of the
indoor management rule. The above discussed rules suggest the situation in which the indoor
management rule can be applied and disregarded. These rules have to be applied to the facts
of the case in order to come to an reasoned conclusion.
In this case the registrar general had allowed a mortgage in relation to a transaction which has
not been entered into by the organization (NORTHSIDE DEVELOPMENTS PTY. LTD) in a
proper manner. The transaction has been approved by a person who purported to act as the
company secretary of the company but in reality he was not. In this situation there was

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alleged knowledge on the part of the director that there was some kind of discrepancy in
relation to the authority of the company secretary.
As per the indoor management rule it can be stated that the third party who is the registrar has
the right to make an assumption with respect to the transaction that the person acting on
behalf of the company has complied with all requirements in relation to internal management
of the organization. the person is deemed to have authority in the given situation by the third
party as per the --- case.
However there are various exceptions to this rule, these exceptions thus have to be applied in
the given facts of the case. The first exception which is going to be applicable is Morris v.
Kanssen. Here the primary reason for the non applicability of the indoor management rule
was that where a reasonable person would have the idea of making an inquiry due to the
suspicion incurred by him, he has to make that inquiry and cannot merely rely upon the
application of this rule. The inquiry has to be made towards the verification of the authority
of the person who is purporting to act on behalf of the organization. in this situation the
transaction has been approved by a person who purported to act as the company secretary of
the company but in reality he was not. In this situation there was alleged knowledge on the
part of the director that there was some kind of discrepancy in relation to the authority of the
company secretary. Thus it was the duty of the registrar general to make an additional inquiry
in relation to the authority of the company secretary which was actually not done in this case.
Further it can be stated that the registrar general attempted to rely on the rule in an
unreasonable manner and thus the application of the rule in the given situation would not be
fair.
Through the application of the principles which have been stated above in the case of
Kreditbank Cassel G.m.b.H. v. Schenkers it can be determined that the rule cannot further be

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applied. This is because the assumption which had been made by the respondent in this
situation was not carried out in good faith.
In addition through the application of Ruben v Great Fingall Consolidated where it had been
stated that doctrine of making assumption can be applied in circumstances which have the
element of irregularity which may have had an impact on the dealing otherwise in a bona fide
manner and the application is strictly prohibited in situation where there is an element of
forgery, it is evident that the application of the indoor management rule should not be done in
this case.
There was clear evidence which was present in this case which suggested that there was an
attempt to appoint the son of the director in the position of the company secretary of the
company. The person was thus actually not the company secretary of the company when the
dealing had actually been entered upon into. Thus the court will be correct in relation to the
findings that the dealing has not been properly conducted in terms of execution of the
documents and thus is invalid. In addition a reasonable person who had the knowledge about
such situation in the position of the respondent would have taken addition measures to verify
or make inquiries in relation to the authority of the company secretary.
Conclusion
Thus in the given situation it can be evidently concluded through the application of the above
discussed rules that the application of the indoor management rule in this case to protect the
respondent should not be done.

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References
A.L. Underwood Ltd. v. Bank of Liverpool (1924) 1 KB 775
Bank of Ireland v. Evans' Trustees (1855) 5 HLC 389 (10 ER 950)
E.B.M. Co. Ltd. v. Dominion Bank (1937) 3 All ER 555,
Kreditbank Cassel G.m.b.H. v. Schenkers (1927) 1 KB 826.
Morris v. Kanssen (1946) AC 459
Rolled Steel Ltd. v. British Steel Corporation (1986) Ch 246
Ruben v Great Fingall Consolidated (1906) AC 439
The Royal British Bank v. Turquand (1856) 6 El. and Bl. 327 (119 ER 886).