The “Indoor Management Rule” apparently developed as a means of mitigating the harshness and burdens of the doctrine of constructive notice in relation to outsiders dealing with companies; the doctrine of constructive notice states that persons dealing with a company are deemed to have notice of the contents of its registered documents. The reason for this was stated by, Lord Wensleydale in Ernest v Nicholls to be the fact of the public nature of registration: All persons therefore, must take notice of the deed (of settlement) and the Provisions of the Act. If they do not choose to acquaint themselves with the powers of the directors, it is their own fault, and if they give credit to any unauthorized persons they must be contented to look to them only, and not to the company at large. The stipulations of the deed, which restrict and regulate their authority, are obligatory on those who deal with the company.
However, a qualification to the rule of constructive notice developed, which favoured third parties as against companies. This rule, known as the indoor management rule may be relied on by a third party where the company's public documents contain nothing which indicates that the contract in question may not be made. If the documents confer power on the company's officers to bind the company, but provide that certain preliminary conditions or formalities must be complied with before the power may be exercised, then the contractor or the third party is not obliged to ensure that those conditions or formalities have been fulfilled. He is entitled to assume that the company's officers are acting lawfully. This means that, third parties or people dealing with a company are not supposed to found out if the directors of the company have the authority to perform, all procedures of the corporation have been complied with, and that all the terms and conditions in the company’s regulation have been fulfilled. To do so will not encourage smooth running of business. When this happen, it will impose a serious burden on third parties in their dealings with companies, in this case people transacting with companies are entitled to assume that internal company rules are complied with, even if they are not.
This rule, also known as the “Rule in Royal British Bank v. Turquand” states that outsiders dealing with a company are not bound to ensure that all the internal regulations of the company have in fact been complied with as regards the exercise and delegation of authority: but they are entitled to assume that all acts of internal management have been properly carried out in accordance with the maxim “omnia praesumuntur rite et solemniter esse acta” – “all things have been done properly and solemnly which ought to have been done”. In other words, a person dealing with an incorporated company is not expected to peep into the internal affairs of the company or to investigate the locus standi of the officers before transacting any business of a normal every-day nature with the company. The case of Royal British Bank v. Turquand, was the case in which the rule was first enunciated and therefore, the locus classicus on this point. In that case, the Royal British Bank sued Turquand as the liquidator of the Coal brook Steam, Coal, and Swansea and London Railway Co., on a bond signed by two directors, whereby the latter company acknowledged itself to be bound to the Royal British Bank in an amount of £2,000. Under the constitution of the company the directors, might borrow on bond such sums as should, from time to time, by a general resolution of the company, be authorized to be borrowed, and the defendant pleaded that there had been no such resolution. The Court held that the defendant was bound. Jervis CJ gave the judgment of the Court. I am of opinion that the judgment of the Court of Queen's Bench ought to be affirmed. I incline to think that the question which has been principally argued both here and in that Court does not...
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