And the party here on reading the deed of settlement, would find, not a prohibition from borrowing but a permission to do so on certain conditions. Finding that the authority might be made complete by a resolution, he would have a right to infer the fact of a resolution authorizing that which on the face of the document appear to be legitimately done.

East Holyford Mining Co[2]. The case is an excellent example of Court drawing out qualifications to the rule. In this case the company's bank made payments based on a formal copy of a resolution of the board authorizing payments of cheques signed by any two of three named "directors" and countersigned by the named "secretary".

The copy was itself signed by the secretary. It came out subsequently that neither the directors nor the secretary had ever been formally appointed. According to the articles, the directors were to be nominated by the subscribers to the memorandum and the cheques were to be signed in such manner as the board might determine.

It was held by the House of Lords that since the bank had received formal notice in the ordinary way of the board's decision, it was not bound to enquire further.

The Turquand's rule has also obtained statutory recognition in Section 9 1 of the European Communities Act, , which reads. Provided that nothing in this section shall be deemed to give validity to acts done by a director after his appointment has been shown to the company to be invalid or to have terminated: Bona fide allottees of shares are protected by the Doctrine of Indoor Management under s They were not bound to enquire whether the acts of the Directors which as in this case related to internal management had been properly and regularly performed.

Even when the Directors exceed their powers or infringe the restrictions imposed upon them, the company may be bound for the outsider dealing with the company is only required to see that the transactions are consistent with the article. In the following way: They need not enquire into the regularity of the internal proceedings what -Lord Hatherley called 'indoor management'.

So if there is a managing director and authority in the articles for the directors to delegate their powers to him, a person dealing with him may assume that it is within the ordinary duties of a managing director. All he has to see is that the managing director might have power to do what he purports to do.

But the rule cannot apply where the question, as here, is not one as to the scope of the power exercised by an apparent agent of the company, but is in regard to the very existence of the agency. Ltd,[5] the plaintiff company sued the defendant company on a loan for Rs. Among other things the defendant company raised the plea that the transaction was not binding as no resolution sanctioning the loan was passed by the board of directors.

The court, after referring to Turquand's case and other Indian cases, held: If the transaction in question could be authorised by the passing of a resolution, such an act is a mere formality. A bona fide creditor, in the absence of any suspicious circumstances, is entitled to presume its existence.

A transaction entered into by the borrowing company under such circumstances cannot be defeated merely on the ground that no such resolution was in fact passed. The passing of such a resolution is a mere matter of indoor or internal management and its absence, under such circumstances, cannot be used to defeat the just claim of a bona fide creditor. A creditor being an outsider or a third party and an innocent stranger is entitled to proceed on the assumption of its existence ; and is not expected to know what happens within the doors that are closed to him.

Where the act is not ultra vires the statute or the company such a creditor would be entitled to assume the apparent or ostensible authority of the agent to be a real or genuine one. He could assume that such a person had the power to represent the company, and if he in fact advanced the money on such assumption, he would be protected by the doctrine of internal management.

Commissioner of police[6] the learned judge observed that the lenders to a company should acquaint themselves with memorandum and articles but they cannot be expected to embark upon an investigation as to legality, propriety and regularity of acts of directors. The rule is based upon obvious reasons of convenience in business relations.

Firstly, the memorandum and articles of associations are public documents, open to public inspection. The rule is of great practical utility. It has been applied in a great variety of cases involving rights and liabilities.

Thus, where the directors of company having the power to allot shares only with the consent, something which he could do only with the approval of the board; where the managing agents having the power to borrow with the approval of directors borrowed without any such approval, the company was held bound. Turquand's Rule and Consequences The Indian Courts in certain recent judgments have further broadened the scope of the Doctrine of indoor management. The object being the same i.

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