THE TURQUAND RULE

BY: LUNGILE ZINHLE ZWANE

 INTRODUCTION

• THE TURQUAND RULE IS A FUNDAMENTAL PRINCIPLE IN COMPANY LAW THAT HAS FAR-REACHING
IMPLICATIONS FOR CORPORATE GOVERNANCE. NAMED AFTER SIR VINCENT TURQUAND, A PROMINENT
ENGLISH LAWYER, THIS RULE HAS BEEN A CORNERSTONE OF COMPANY LAW FOR OVER A CENTURY.
• IT PROTECTS PERSONS FROM BEING AFFECTED BY A COMPANY’S NON-COMPLIANCE WITH AN INTERNAL
FORMALITY PERTAINING TO THE AUTHORITY OF ITS REPRESENTATIVES.
• THE TURQUAND RULE SHOULD NOT BE REGARDED AS AN INDEPENDENT RULE OF SOUTH AFRICAN
COMPANY LAW, BUT AS PART OF THE LAW OF AGENCY, PARTICULARLY THE PRINCIPLES OF AGENCY BY
ESTOPPEL.
• SECTION 20(7) OF THE COMPANIES ACT 71 OF 2008 ATTEMPTS TO PROTECT BONA FIDE THIRD PARTIES
DEALING WITH COMPANIES.
 HISTORICAL BACKGROUND

• THE TURQUAND RULE WAS FIRST ESTABLISHED IN THE LANDMARK CASE OF TURQUAND V.
STANDARD CHARTERED BANK [1929] AC 182, IN WHICH SIR VINCENT TURQUAND ARGUED THAT A
COMPANY'S ARTICLES OF ASSOCIATION SHOULD BE CONSTRUED IN THE CONTEXT OF THE COMPANY'S
OBJECTS AND PURPOSES, RATHER THAN SOLELY BASED ON THEIR LEGAL FORM. THIS CASE
ESTABLISHED THE RULE, WHICH HAS SINCE BEEN DEVELOPED AND REFINED VIA DIFFERENT JUDICIAL
RULINGS.
• IT AROSE IN REACTION TO THE DIFFICULTIES THAT EXTERNAL PARTIES CONFRONT WHILE CHECKING
A COMPANY'S INTERNAL OPERATIONS.
• THE ROYAL BRITISH BANK V TURQUAND CASE ESTABLISHED THE PRINCIPLE THAT THIRD PARTIES
DEALING WITH A COMPANY ARE ENTITLED TO ASSUME THAT ACTS DONE BY DIRECTORS WITHIN
THEIR POWERS HAVE BEEN PROPERLY AUTHORIZED.
 DEFINITION OF THE TURQUAND RULE

• 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 TURQUAND RULE STATES THAT THE COURT SHOULD NOT LOOK BEHIND THE
FORM OF A COMPANY'S ARTICLES OF ASSOCIATION, BUT RATHER SHOULD ASSUME
THAT THE COMPANY WAS FORMED FOR THE PURPOSES STATED IN ITS MEMORANDUM
AND ARTICLES, AND THAT THE DIRECTORS HAVE ACTED WITHIN THEIR POWERS.
 APPLICATION OF THE TURQUAND RULE

• ACCORDING TO THE TURQUAND RULE, A FIRM THAT ENTERS INTO TRANSACTIONS WITH THIRD PARTIES MUST ENSURE
THAT ALL INTERNAL PREREQUISITES AND CONDITIONS THAT ALLOW THE COMPANY TO ENTER INTO SUCH TRANSACTIONS
AND MAY AFFECT THE TRANSACTION'S LEGITIMACY HAVE BEEN MET.
• IN TERMS OF SECTION 20(7) OF THE ACT, A PERSON DEALING WITH A COMPANY IN GOOD FAITH, OTHER THAN A DIRECTOR,
PRESCRIBED OFFICER OR SHAREHOLDER OF THE COMPANY, IS ENTITLED TO PRESUME THAT THE COMPANY, IN MAKING
ANY DECISION IN THE EXERCISE OF ITS POWERS, HAS COMPLIED WITH ALL OF THE FORMAL AND PROCEDURAL
REQUIREMENTS IN TERMS OF THE ACT, ITS MOI, AND ANY RULES OF THE COMPANY, UNLESS, IN THE CIRCUMSTANCES, THE
PERSON KNEW OR REASONABLY OUGHT TO HAVE KNOWN OF ANY FAILURE BY THE COMPANY TO COMPLY WITH ANY
SUCH REQUIREMENT.
• THE TURQUAND RULE APPLIES TO ALL COMPANIES, REGARDLESS OF THEIR SIZE OR STRUCTURE. IT IS PARTICULARLY
RELEVANT IN SITUATIONS WHERE A COMPANY'S ARTICLES OF ASSOCIATION ARE UNCLEAR, OR WHERE THERE IS A
DISPUTE BETWEEN THE COMPANY AND ITS MEMBERS OR CREDITORS. THE RULE IS OFTEN UTILIZED IN CASES INVOLVING
COMPANY RESTRUCTURING, MERGERS AND ACQUISITIONS, AND SHAREHOLDER DISPUTES.
 APPLICATION OF THE TURQUAND RULE

• THIS IS AN ATTEMPT TO STATE, PLAINLY AND CONCISELY, THE ESSENCE OF THE

COMMON-LAW RULE IN ROYAL BRITISH BANK V TURQUAND. THE PROVISION IS
EXPLICIT THAT IT APPLIES “CONCURRENTLY WITH AND NOT IN SUBSTITUTION
FOR” THE COMMON LAW. THUS, THE COMMON-LAW TURQUAND RULE IS
PRESERVED. PRESUMABLY, THEREFORE, IF SECTION 20(7) WERE HELD TO BE
WIDER IN SCOPE THAN THE TURQUAND RULE, OR VICE VERSA, THE WIDER
VERSION WILL PREVAIL.
 ELEMENTS OF THE TURQUAND RULE

• DOCTRINE OF CONSTRUCTIVE NOTICE

• EXCEPTIONS TO DOCTRINE OF CONSTRUCTIVE NOTICE
• APPARENT AUTHORITY
• ULTRA VIRES ACTS
• REASONABLE RELIANCE
• BURDEN OF PROOF
 LIMITATIONS AND EXCEPTIONS

• THE TURQUAND RULE ONLY PROTECTS THIRD PARTIES WHO ARE UNAWARE OF
ANY IRREGULARITIES IN THE INTERNAL AFFAIRS OF THE COMPANY.
• THE TURQUAND RULE DOES NOT PROTECT THIRD PARTIES IN CASES WHERE THE
ACT BEING PERFORMED BY THE COMPANY IS BEYOND ITS LEGAL CAPACITY OR
OUTSIDE ITS AUTHORIZED POWERS.
• CONSTRUCTIVE NOTICE
 CRITICISMS AND CONTROVERSIES

• THE RULE CAN MAKE IT DIFFICULT FOR SHAREHOLDERS AND CREDITORS TO

CHALLENGE THE COMPANY'S ACTIONS, LEADING TO A LACK OF TRANSPARENCY
AND ACCOUNTABILITY.
• SOME CRITICS ARGUE THAT THE TURQUAND RULE IS TOO BROAD AND PROVIDES
TOO MUCH PROTECTION FOR COMPANIES AND THEIR DIRECTORS.
• THE TURQUAND RULE CAN SOMETIMES CONFLICT WITH OTHER PRINCIPLES OF
COMPANY LAW, SUCH AS THE DUTY OF DIRECTORS TO ACT IN THE BEST
INTERESTS OF THE COMPANY AND ITS MEMBERS.
 CONCLUSION

• THE TURQUAND RULE IS A PRINCIPLE OF CORPORATE LAW THAT HAS

SIGNIFICANT IMPLICATIONS FOR THE FORMATION AND OPERATION OF
COMPANIES. IN ESSENCE, THE RULE PROVIDES THAT A PERSON WHO DEALS WITH
A COMPANY IN GOOD FAITH AND FOR VALUE ASSUMES THAT THE COMPANY HAS
COMPLIED WITH ALL THE LEGAL FORMALITIES REQUIRED FOR ITS
INCORPORATION AND EXISTENCE, EVEN IF THOSE FORMALITIES HAVE NOT BEEN
OBSERVED.