This article is written by Divya Singh Chauhan, law graduate from Institute of management, Noida during her internship with LeDroit India.
Keywords:
• Turquand Rule
• Doctrine of Indoor Management
• Company Law
• Third-Party Protection
• Corporate Governance
• Corporate Authority
Abstract
The Turquand Rule, also known as the Doctrine of Indoor Management, plays a pivotal role in corporate law, ensuring that third parties dealing with a company are protected, even when the company’s internal procedures are not followed. This rule prevents companies from challenging the validity of transactions made with outsiders if the latter are unaware of any irregularities within the company. However, there are notable exceptions to this rule, primarily involving situations where third parties have knowledge of the internal restrictions or irregularities. In this article, we explore the scope and significance of the Turquand Rule, its exceptions, and case law examples illustrating its application.
- Introduction to the Turquand Rule
The Turquand Rule was established in the landmark case of Royal British Bank v. Turquand (1856). It protects third parties from any internal inconsistencies within a company’s operations, ensuring that individuals and entities acting in good faith with a company are not impacted by internal procedural breaches they were unaware of.
- The Essence of the Doctrine of Indoor Management
The core principle of the Doctrine of Indoor Management is that external parties dealing with a company do not need to inquire into the internal workings or decisions of the company. This creates an environment of security for third parties, who may otherwise be hesitant to engage with companies due to fear of internal governance issues.
- Exceptions to the Turquand Rule
Despite the broad protection offered by the Turquand Rule, there are significant exceptions:
• Knowledge of Irregularity: If the third party has knowledge of an internal irregularity or failure to comply with company regulations, they may not invoke the protection of the Turquand Rule.
• Fraud or Illegality: The rule does not apply when a transaction is fraudulent or illegal.
• Contravention of Statutory Provisions: Transactions that contravene mandatory statutory provisions are not protected under the rule.
- Case Laws and Illustrations
• Royal British Bank v. Turquand (1856): The case established the foundational principle of the Turquand Rule, where a bank dealing with a company was unaware of an internal procedural failure and was protected from the consequences of that failure.
• Howard v. Patent Ivory Manufacturing Co. (1888): This case further affirmed the principle of the Doctrine of Indoor Management, stating that an outsider is entitled to assume that all internal company procedures are properly followed.
• Mahadeo Laxman v. Rajendra Trading Co. Ltd. (2012): In this modern case, the Turquand Rule was applied, and the company was bound by the unauthorized actions of an agent, as the third party had no reason to believe that the company’s internal protocols were violated.
• Indian Oil Corporation Ltd. v. Amritsar Gas Service (1991): This judgment discussed the applicability of the Turquand Rule in corporate transactions and highlighted exceptions such as when third parties have knowledge of internal restrictions.
- Conclusion
The Turquand Rule ensures the stability of corporate transactions by protecting third parties acting in good faith. This doctrine promotes trust and security in dealings with companies, while its exceptions ensure that the rule cannot be misused. However, when third parties are aware of internal breaches or participate in fraudulent activities, the protection of the Doctrine of Indoor Management does not extend to them. The rule’s application in modern corporate governance continues to be relevant, ensuring that both companies and third parties are treated fairly under the law.
In conclusion, the Turquand Rule and its exceptions play a critical role in upholding the principles of corporate governance and protecting third-party interests in business transactions.
References
- Royal British Bank v. Turquand (1856) 6 E & B 327
- Howard v. Patent Ivory Manufacturing Co. (1888) 38 Ch D 156
- Mahadeo Laxman v. Rajendra Trading Co. Ltd. (2012) 1 SCC 324
- Indian Oil Corporation Ltd. v. Amritsar Gas Service (1991) 3 SCC 524
