Dr. AbdelGadir Warsama – Legal Counsel
Asia 728x90

To what extent you are supposed to be aware of the internal affairs of the company you are dealing with, say in a big contract or other normal business transactions. This very delicate legal issue, has been discussed by the House of Lords in some cases.

The issue was first discussed in the Turquand case. The facts of this case reveal that, Turquand was the official liquidator of an insolvent company which gave a bond to a bank to secure the drawings on its current account. The bond signed by two directors, however, when the company was sued it alleged that under its articles of association, directors only had the power to borrow up to an amount authorized by a company resolution. In other words, the company as per its internal rules, is not responsible for the act taken by such directors. The Court of Exchequer Chamber, decided that the company is liable.

However, the rule in Turquand case was not accepted as being firmly entrenched in law until it was endorsed later by thHouse of Lords. Lord Hatherly phrased the law stating that, (When there are persons conducting the affairs of the company in a manner which appears to be perfectly consonant with the articles of association, those so dealing with them externally are not to be affected by irregularities which may take place in the internal management of the company).

So, where the company’s articles provided thacheques should be signed by any two of the three named directors, the fact that the directors who had signed the cheques had never been properly appointed was held to be a matter of internal management, and the third parties who received those cheques were entitled to presume that the directors had been properly appointed, and cash the cheques.

According to the Turquand rule, each outsider contracting with a company in good faith is entitled to assume that the internal requirements and procedures have been complied with. The company will consequently be bound by the contract even if the internal requirements and procedures have not been complied with. The exceptions here are, if the outsider was aware of the fact that the internal requirements and procedures have not been complied with and acted in bad faith, or if the circumstances under which the contract was concluded on behalf of the company were suspicious.

However, it is sometimes possible for an outsider to ascertain whether an internal requirement or procedure has been complied with. If it is possible to ascertain this fact from the company’s public documents, the doctrine of disclosure and the doctrine of constructive notice will apply and not the Turquand rule. The Turquand rule was formulated to keep an outsider’s duty to inquire into the affairs of a company within reasonable bounds, but if the compliance or non-compliance with an internal requirement can be ascertained from the company’s public documents, the doctrine of disclosure and the doctrine of constructive notice will apply.

If it is an internal requirement that a certain act should be approved by a special resolution, the Turquand rule will therefore not apply in relation to that specific act, since a special resolution is registered with Company Registrar and is deemed to be public information.

By implication, I feel that the ruling in this case raises the point that, when contracting with a company it would be better to go the extra mile to have general info about its internal regulations, or at least to go through the Articles of Association of the company.

Source: Dr. AbdelGadir Warsama /