Indoor Management Rule in Corporate Governance: Case Analysis

The indoor management rule allows outsiders interacting with a company to assume that internal rules have been followed without needing detailed verification. This principle, rooted in The Royal British Bank v. Turquand (1856), is pivotal in protecting third parties from being adversely affected by internal company malpractices unknown to them. Key cases like Rolled Steel Ltd. v. British Steel Corporation and E.B.M. Co. Ltd. v. Dominion Bank highlight how this rule balances the interests of external parties against corporate entities' internal governance issues, ensuring fairness in business transactions. The analysis also explores limitations through precedents such as Crabtree-Vickers Pty. Ltd. v. Australian Direct Mail Advertising and Addressing Co. Pty. Ltd., emphasizing that actions not authorized by a company's constitution fall outside this rule's protective scope. Understanding the nuances of these cases helps clarify when the indoor management rule applies, guiding legal professionals in advising on corporate transactions.

Running head: COMPANY LAW
Company law
Name of the Student:
Name of the University:
Author Note

1
COMPANY LAW
Issue
The issue identified in this situation is in relation to the application of the Indoor
management rule. Whether the appellant (NORTHSIDE DEVELOPMENTS PTY. LTD) has
the right to make a claim for compensation from the respondent (REGISTRAR-GENERAL)
in relation to the sale of land owned by the appellant.
Rule
The” indoor management rule” had been provided through the case of The Royal
British Bank v. Turquand (1856) 6 El. and Bl. 327 (119 ER 886). In this case it has been
stated by the judge that a third party who is dealing with the company has the right to make
an assumption that all legal provisions of the organization have been complied with, before
the organization gets into a transaction with the third party.
In the case of Morris v. Kanssen (1946) AC 459, at pp 474-475 it had been ruled by
court that the indoor management rule has been initiated to provide protection to those
persons who have the right to make an assumption as they do not have the capacity of finding
out the truth in relation to the authority claimed by the other party to the contract. However if
this condition is not satisfied the provisions of the rule cannot be invoked. A person cannot
apply the rule merely in his favor by not making an inquiry which he would have reasonably
thought to be necessary or could have made in relation to finding out authority of the other
person.
In the case of E.B.M. Co. Ltd. v. Dominion Bank (1937) 3 All ER 555, A.L.
Underwood Ltd. v. Bank of Liverpool (1924) 1 KB 775 and Rolled Steel Ltd. v. British Steel
Corporation (1986) Ch 246, it had been ruled by the court that a reasonable person would put

2
COMPANY LAW
up an inquiry based upon the nature of the transaction even where there is no special
relationship of his with the company.
In the case of Ruben v Great Fingall Consolidated (1906) AC 439 it has been stated
by the court that the doctrine is only applicable in relation to irregularities which otherwise
may have an impact on a transaction in good faith and cannot be applied in situation of
forgery. These provisions have been also discussed in the case of Kreditbank Cassel
G.m.b.H. v. Schenkers (1927) 1 KB 826.
In the case of Uxbridge Permanent Benefit Building Society v. Pickard (1939) 2
KB 248 it had been ruled by the court that the solicitor had been liable for fraud done by his
clerk even in situation where the fraud was related to forgery and thus forgery may not be
considered as a true exception to the indoor management rule.
In the case of Houghton and Co. v. Nothard, Lowe and Wills (1927) 1 KB 246 it
has been ruled by the court that the rule is applicable in situation where power or authority
has been applied by an officer of the company which was at risk of delegation as per the
articles of association. Irrespective of the fact that the officer actually exceeded his authority
the act was binding on the company unless there was knowledge on the part of the person that
there was no authority of the other person in relation to the company or an inquiry has to be
done in relation to such authority.
In the case of Crabtree-Vickers Pty. Ltd. v. Australian Direct Mail Advertising
and Addressing Co. Pty. Ltd. (1975) 133 CLR 72 it had been ruled by the court that the
rule provided by the Turquand case is subjected to the provisions of the law of agents and
principles and the application of the rule is therefore to be subjected to actual or ostensible
authority of the agent purporting to act on behalf of the organization. Thus the act would not
be binding on the company where it is not authorized by the constitution. However nothing

3
COMPANY LAW
had been mentioned in this case in relation to documents which have been executed under the
common seal of the company.
In the case of Equity Nominees Ltd. v. Tucker (1967) 116 CLR 518 it had been
ruled by the court that the need of a countersignature is because the authentication in relation
to directors signature can be done.
In the case of Bank of Ireland v. Evans' Trustees (1855) 5 HLC 389 (10 ER 950) it
had been held by the court that the negligence on the part of the company cannot make them
evade a liability. In this case a secretary of the company fraudulently used the common seal
of the company to execute a document as he had access to it because of negligence on the
part of the bank’s trustee.
Lockyer v. Buckhurst Park Properties (Mangal) Ltd. (1964) 2 QB 480 is a case
where it had been stated by the court that an ostensible or apparent authority is a legal
relationship between contractor and the principle and is created via representation which is
provided by the principal to the contractor intended and acted upon the contractor that he has
the right to get into a contract on behalf of the principle within the limitations of authority
provided by them.
Application
In this case the court allowed the appeal which has been made by the applicant and
the orders which had been provided in relation to the case through the court of appeal of the
New South Wales Supreme Court has been set aside and the respondent has been ordered to
pay the cost of the appellant in relation to the appeal

4
COMPANY LAW
Through the application of the indoor management rule in the case it was clear that
the responsibility of the respondent did not extend to making further inquires and he could
make an assumption that contract has been formed in compliance with all legal requirements.
The court in this case applied the provisions of the case of Morris v. Kanssen where it
was held that indoor management rule has been initiated to provide protection to those
persons who have the right to make an assumption as they do not have the capacity of finding
out the truth in relation to the authority claimed by the other party to the contract. However if
this condition is not satisfied the provisions of the rule cannot be invoked. A person cannot
apply the rule merely in his favor by not making an inquiry which he would have reasonably
thought to be necessary or could have made in relation to finding out authority of the other
person. In the present case was clear that the requirements have not be satisfied and any
person in the position of the respondent would have taken additional measures to inquire in
relation to legality behind the formation of the contract.
In additions the principles of Ruben v Great Fingall Consolidated and Kreditbank
Cassel G.m.b.H. v. Schenkers had also been applied in this case where it has been stated by
the court that the doctrine is only applicable in relation to irregularities which otherwise may
have an impact on a transaction in good faith and cannot be applied in situation of forgery. In
this case although there was no forgery involved in the situation the transaction had not been
done in good faith by the respondent as he was aware that the internal regulations of the
company has not been complied with.
In this case it had been held by the court in this case that the third party has actual
information in relation to an irregularity when the transaction was entered into by them.
Moreover in this case there was a failure on the part of the outsider (the respondent) of not

5
COMPANY LAW
making inquires which would have been done customarily or normally by a reasonable
outsider in the same position as the respondent and thus the application of the indoor
management rule in this case cannot be done.
The primary arguments which had arise in relation to this contract is relation to the
liabilities of the appellant. In this case it was clear that the contract had been signed a
director and his son who was appointed to be the company secretary of the company. In
addition there was no knowledge about the contract which was held by the other two
directors as well as the appointment of the son as the company secretary of the company. In
this situation it had been correctly held by the supreme court that the affixing the common
seal of the company to the contract was not done in a lawful and valid manner. It was the
responsibility of the respondent in this case that he should have made proper inquires in
relation to the common seal of the appellant.
The application of the case of Crabtree-Vickers Pty. Ltd. v. Australian Direct Mail
Advertising and Addressing Co. Pty. Ltd had been rejected by the court in this case as it had
been ruled by the court that the rule provided by the Turquand case is subjected to the
provisions of the law of agents and principles and the application of the rule is therefore to be
subjected to actual or ostensible authority of the agent purporting to act on behalf of the
organization. Thus the act would not be binding on the company where it is not authorized by
the constitution. This is because nothing had been mentioned in this case in relation to
documents which have been executed under the common seal of the company which was a
major factor of concern in relation to the case in hand.
In this case has been held by the court that it is not mandatory to take into
consideration the arguments which have been made in relation to the appellant that as the

6
COMPANY LAW
appointment of Gerard Sturgess as the secretary has not been done they are not bound by the
mortgage in relation to the rule provided by the turquand’s case or otherwise. However it had
been ruled by the court that in its view a return which has been filed with the corporate
Affairs commission will consist an assumption in relation to truth behind the matter stated
therein. In addition in situation where it is allowed by the company to conduct its affairs in a
manner where inaccurate returns are filed, it contributes to the assumption thereby that it is
prevented from making an otherwise assertion.
Conclusion
Thus in this case the court had ruled in the favor of the appellant and held that the
application of the indoor management rule cannot be done to the facts.

7
COMPANY LAW
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)
Crabtree-Vickers Pty. Ltd. v. Australian Direct Mail Advertising and Addressing Co. Pty.
Ltd. (1975) 133 CLR 72
E.B.M. Co. Ltd. v. Dominion Bank (1937) 3 All ER 555,
Equity Nominees Ltd. v. Tucker (1967) 116 CLR 518
Houghton and Co. v. Nothard, Lowe and Wills (1927) 1 KB 246
Kreditbank Cassel G.m.b.H. v. Schenkers (1927) 1 KB 826.
Lockyer v. Buckhurst Park Properties (Mangal) Ltd. (1964) 2 QB 480
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).
Uxbridge Permanent Benefit Building Society v. Pickard (1939) 2 KB 248