 CORPORATE TRANSACTIONS – Agency

& The indoor management rule.

 Q : Who are the organs of a company?
 A: The BOD and shareholders in GM.
 Q : Whose acts bind the company?
 A : The agents of the company acting within the
scope of their authority. (law of agency applies)
 Q : Who then is the “company”?
 A : The organs – acting within the power given by
M&A is regarded as the company itself - the
“directing mind and will of the company” (DMW); its
alter-ego. This is called organic theory of corporate
personality. DR John Chuah 2021
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 When an outsider deals with the company several
issue arises:-
 The contract is only binding on the company if the
agent acted within the scope of his authority as stated
in the M&A. – law of agency (express and apparent
as discussed above)
 Further if the agent/BOD acted in breach of the M&A
by entering into a transaction outside its object clause
(even if the agent had power to enter such contracts)
then the contract is UV but valid – via sec.20 CA’65.
 The 3rd party who wants to escape liability on the
contract would plead that they had no knowledge of
the M&A - DR John Chuah 2021
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 DOCTRINE OF CONSTRUCTIVE NOTICE

 3rd parties who deals with the company is deemed to

have knowledge of the nature and contents of the
M&A as it is a public document which has been
lodge with the ROC. They are deemed to have read
and understood the M&A. This assumption is known
as the doctrine of constructive notice.

 Woodland Development Sdn. Bhd. v. Chartered Bank

 H : Any one who has dealings with the company must
be taken to have notice of the contents of M&A,
whether he has read them or not.
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 The doctrine of constructive notice is mitigated by
the rule in Turquand’s case.

 The Indoor Management Rule

 Case : Royal British Bank v. Turquand
 Here the deed of settlement (M&A) empowered the
BOD to borrow such sums authorized by resolution
of GM of shareholders. The directors borrowed 2000
pounds and the company contended that the directors
had exceed their powers since the resolution did not
state the limit of the loan.

DR John Chuah 2021

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 H : The outsider (bank) dealing in good faith can
assume that the acts of the company which is a matter
of internal management has been duly and properly
performed. He need not inquire whether such a
resolution had in fact been passed. Here in the
absence of illegality, the excess of authority is matter
only between the directors and the shareholders.
(since the M&A empowers directors to borrow the
company cannot deny the agent lacks the requisite
authority)
 Contoh :-
 Irregular proper holding of meeting
 Board not properly constituted
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 In short the rule protects the outsider(3rd party) who
is unaware of the irregularity (since this could not be
discerned from the M&A) in the internal matters of
the company*. It estoppes the delinquent company
from denying its capacity to contract.
 *such as proper procedure in GM (lack of quorum,
notice not given or voting irregularity) or BOD not
properly constituted.
 Case : British Thompson-Houston Ltd. v. Federated
European Bank
 M&A allowed the company to delegate powers to any
one of its four directors to execute guarantee. Here
the guarantee was executed by only one of the
directors.
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 H : The rule in Turquand applies to cover this
situation as the assumed authority of the one director
is a question of internal management.
 Critics of this maxim argues that over extensive
application of it may facilitate fraud by people
(purportedly acting for company) who act unjustly at
the expense of innocent creditors and shareholders.
(Northside Developments v. RG)
 Case : Sin Chia v. Lin Siong Motor Co. Ltd
 Here 3 directors obtained a loan on the security of 2
post dated cheques and receipt, signed by 2 directors.
Company denied it had authorized the loan.
 H : the P outsider was not required to inquire into the
regularity of internal proceedings of the company.
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 Since the directors were authorized by the articles to
negotiate the loan the company is bound.
 Note : Turquand’s rule is a presumption of fact which
is not irrebutable and the burden of proving certain
judicial exceptions to this rule lies with the party
seeking to invoke it.

 Exceptions to the rule :-

 1. Requirement of good faith – the outsider who
knows or ought to have known about the irregularity
at the time of the transaction cannot avail himself to
the rule.
 Case : Mahfuz bin Hashim v. KPK Daerah Segamat
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 Here the question arose whether P’ was aware or
should be aware that the 3rd parties (chairman and
manager) lacked authority to contract from the board.
P was a member of the company and was fully aware
of its bye-laws.
 H : Members and directors are protected by the rule
and it all depends whether he knows or ought to know
the agent’s lack of authority. Here the P ought to
know the bye-law because he has a copy of it but not
the requirement of signatories since it was not stated
therein. Outsider(3rd party) who deals with an
individual low in the corporate hierarchy cannot take
advantage of the T’s rule. T’s rule applied here.
DR John Chuah 2021
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 Case : Howard v. Patent Ivory Manufacturing
 H : Directors who borrowed more than the stipulated
sum in the article cannot take advantage of the rule
since they ought to have known the internal
requirements of the company. T’s rule did not apply.

 2. Fraud – company not bound by forged documents

even if the 3rd party believed it was issued with the
comp’s authority.
 Case : Ruben v. Great Fingall Consolidated
 H : share certificate with forged signature of the
company was not binding on the company as outsider
could not rely on the rule.
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 Case : Northside Development v. RG
 The question arose whether the instrument which was
executed without the proper authority of the BOD;
however the document was a forgery.
 H : the forgery exception did not apply where the
signature was genuine but unauthorized. That means
Turquand’s rule still applies.2 types of forgery
namely : ‘strict sense’ and ‘looser sense’. The former
refers to an instrument bearing false seal/signature –
here it is not binding on the company (ie T’s rule does
not apply) unless the company is estopped from
denying the falsity of seal/signature/authority of person
affixing it. In the looser sense the seal or
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 signature is authentic but the authority given to the
persons affixing them is in question. Here the
instrument is binding on the company (T’s rule
applies). Here the loss falls on the company unless
the 3rd party was put on inquiry. If on inquiry the he
was not satisfied that there was proper authority then
the company can deny its bound by the instrument.

 3. Failure to make proper inquiry when he should as a

reasonable lay man under the circumstances.
 Case : Pekan Nenas Industries v. Chan Ching Chuen
 H: The purpose and extent of inquiry will depend on
whether the circumstances raised a doubt on the
possibility of abuse of power / existence of power.
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 Where the circumstances raised a doubt the purpose
of the inquiry is not to ascertain whether the
transaction is regular; but to dispel the said doubt ie
to negative/neutralize the suspicion. If he acts in good
faith and has no notice of abused authority then the
company is bound (T’s rule applies). On the other
hand if where there is doubt regarding authority the
outsider cannot proceed until he has ascertain the said
authority or fresh evidence of authority is revealed.
Thus reasonable explanation / assurance given by
agent of company will not help the outsider (T’s rule
will not apply).
 Note : the fact that the inquiry of the agent would not
have revealed the lack of authority / irregularity does
not exempt him making inquiry.
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 Case : Malaysian Resouces Corp v. Juranas Sdn Bhd
 H : If inquiries made by the outsider would have
revealed the irregularity / lack of authority; and he is
bound to make such inquiries in the first place but did
not then he cannot rely on T’s rule.
 Q : what if he made inquiries but could not ascertain
the irregularity?
 Case : Irvine v. Union Bank of Australia
 Articles expressly prohibited its directors from
borrowing above a certain limit. Outsider bank
argued that a resolution in GM could have enlarge the
limit borrowed ; and they were entitled to assume
thus. DR John Chuah 2021
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