Recognise the laws relating to companies in Australia; and Examine the duties, rights and responsibilities of company officers.
The issue identified in this situation is in relation to the application of the Indoor management rule. Whether the appellant (NORTHSIDE DEVELOPMENTS PTY. LTD) has the right to make a claim for compensation from the respondent (REGISTRAR-GENERAL) in relation to the sale of land owned by the appellant.
The” indoor management rule” had been provided through the case of The Royal British Bank v. Turquand (1856) 6 El. and Bl. 327 (119 ER 886). In this case it has been stated by the judge that a third party who is dealing with the company has the right to make an assumption that all legal provisions of the organization have been complied with, before the organization gets into a transaction with the third party.
In the case of Morris v. Kanssen (1946) AC 459, at pp 474-475 it had been ruled by court that the indoor management rule has been initiated to provide protection to those persons who have the right to make an assumption as they do not have the capacity of finding out the truth in relation to the authority claimed by the other party to the contract. However if this condition is not satisfied the provisions of the rule cannot be invoked. A person cannot apply the rule merely in his favor by not making an inquiry which he would have reasonably thought to be necessary or could have made in relation to finding out authority of the other person.
In the case of E.B.M. Co. Ltd. v. Dominion Bank (1937) 3 All ER 555, A.L. Underwood Ltd. v. Bank of Liverpool (1924) 1 KB 775 and Rolled Steel Ltd. v. British Steel Corporation (1986) Ch 246, it had been ruled by the court that a reasonable person would put up an inquiry based upon the nature of the transaction even where there is no special relationship of his with the company.
In the case of Ruben v Great Fingall Consolidated (1906) AC 439 it has been stated by the court that the doctrine is only applicable in relation to irregularities which otherwise may have an impact on a transaction in good faith and cannot be applied in situation of forgery. These provisions have been also discussed in the case of Kreditbank Cassel G.m.b.H. v. Schenkers (1927) 1 KB 826.
In the case of Uxbridge Permanent Benefit Building Society v. Pickard (1939) 2 KB 248 it had been ruled by the court that the solicitor had been liable for fraud done by his clerk even in situation where the fraud was related to forgery and thus forgery may not be considered as a true exception to the indoor management rule.
In the case of Houghton and Co. v. Nothard, Lowe and Wills (1927) 1 KB 246 it has been ruled by the court that the rule is applicable in situation where power or authority has been applied by an officer of the company which was at risk of delegation as per the articles of association. Irrespective of the fact that the officer actually exceeded his authority the act was binding on the company unless there was knowledge on the part of the person that there was no authority of the other person in relation to the company or an inquiry has to be done in relation to such authority.
In the case of Crabtree-Vickers Pty. Ltd. v. Australian Direct Mail Advertising and Addressing Co. Pty. Ltd. (1975) 133 CLR 72 it had been ruled by the court that the rule provided by the Turquand case is subjected to the provisions of the law of agents and principles and the application of the rule is therefore to be subjected to actual or ostensible authority of the agent purporting to act on behalf of the organization. Thus the act would not be binding on the company where it is not authorized by the constitution. However nothing had been mentioned in this case in relation to documents which have been executed under the common seal of the company.
In the case of Equity Nominees Ltd. v. Tucker (1967) 116 CLR 518 it had been ruled by the court that the need of a countersignature is because the authentication in relation to directors signature can be done.
In the case of Bank of Ireland v. Evans’ Trustees (1855) 5 HLC 389 (10 ER 950) it had been held by the court that the negligence on the part of the company cannot make them evade a liability. In this case a secretary of the company fraudulently used the common seal of the company to execute a document as he had access to it because of negligence on the part of the bank’s trustee.
Lockyer v. Buckhurst Park Properties (Mangal) Ltd. (1964) 2 QB 480 is a case where it had been stated by the court that an ostensible or apparent authority is a legal relationship between contractor and the principle and is created via representation which is provided by the principal to the contractor intended and acted upon the contractor that he has the right to get into a contract on behalf of the principle within the limitations of authority provided by them.
In this case the court allowed the appeal which has been made by the applicant and the orders which had been provided in relation to the case through the court of appeal of the New South Wales Supreme Court has been set aside and the respondent has been ordered to pay the cost of the appellant in relation to the appeal
Through the application of the indoor management rule in the case it was clear that the responsibility of the respondent did not extend to making further inquires and he could make an assumption that contract has been formed in compliance with all legal requirements.
The court in this case applied the provisions of the case of Morris v. Kanssen where it was held that indoor management rule has been initiated to provide protection to those persons who have the right to make an assumption as they do not have the capacity of finding out the truth in relation to the authority claimed by the other party to the contract. However if this condition is not satisfied the provisions of the rule cannot be invoked. A person cannot apply the rule merely in his favor by not making an inquiry which he would have reasonably thought to be necessary or could have made in relation to finding out authority of the other person. In the present case was clear that the requirements have not be satisfied and any person in the position of the respondent would have taken additional measures to inquire in relation to legality behind the formation of the contract.
In additions the principles of Ruben v Great Fingall Consolidated and Kreditbank Cassel G.m.b.H. v. Schenkers had also been applied in this case where it has been stated by the court that the doctrine is only applicable in relation to irregularities which otherwise may have an impact on a transaction in good faith and cannot be applied in situation of forgery. In this case although there was no forgery involved in the situation the transaction had not been done in good faith by the respondent as he was aware that the internal regulations of the company has not been complied with.
In this case it had been held by the court in this case that the third party has actual information in relation to an irregularity when the transaction was entered into by them. Moreover in this case there was a failure on the part of the outsider (the respondent) of not making inquires which would have been done customarily or normally by a reasonable outsider in the same position as the respondent and thus the application of the indoor management rule in this case cannot be done.
The primary arguments which had arise in relation to this contract is relation to the liabilities of the appellant. In this case it was clear that the contract had been signed a director and his son who was appointed to be the company secretary of the company. In addition there was no knowledge about the contract which was held by the other two directors as well as the appointment of the son as the company secretary of the company. In this situation it had been correctly held by the supreme court that the affixing the common seal of the company to the contract was not done in a lawful and valid manner. It was the responsibility of the respondent in this case that he should have made proper inquires in relation to the common seal of the appellant.
The application of the case of Crabtree-Vickers Pty. Ltd. v. Australian Direct Mail Advertising and Addressing Co. Pty. Ltd had been rejected by the court in this case as it had been ruled by the court that the rule provided by the Turquand case is subjected to the provisions of the law of agents and principles and the application of the rule is therefore to be subjected to actual or ostensible authority of the agent purporting to act on behalf of the organization. Thus the act would not be binding on the company where it is not authorized by the constitution. This is because nothing had been mentioned in this case in relation to documents which have been executed under the common seal of the company which was a major factor of concern in relation to the case in hand.
In this case has been held by the court that it is not mandatory to take into consideration the arguments which have been made in relation to the appellant that as the appointment of Gerard Sturgess as the secretary has not been done they are not bound by the mortgage in relation to the rule provided by the turquand’s case or otherwise. However it had been ruled by the court that in its view a return which has been filed with the corporate Affairs commission will consist an assumption in relation to truth behind the matter stated therein. In addition in situation where it is allowed by the company to conduct its affairs in a manner where inaccurate returns are filed, it contributes to the assumption thereby that it is prevented from making an otherwise assertion.
Conclusion
Thus in this case the court had ruled in the favor of the appellant and held that the application of the indoor management rule cannot be done to the facts.
References
A.L. Underwood Ltd. v. Bank of Liverpool (1924) 1 KB 775
Bank of Ireland v. Evans’ Trustees (1855) 5 HLC 389 (10 ER 950)
Crabtree-Vickers Pty. Ltd. v. Australian Direct Mail Advertising and Addressing Co. Pty. Ltd. (1975) 133 CLR 72
E.B.M. Co. Ltd. v. Dominion Bank (1937) 3 All ER 555,
Equity Nominees Ltd. v. Tucker (1967) 116 CLR 518
Houghton and Co. v. Nothard, Lowe and Wills (1927) 1 KB 246
Kreditbank Cassel G.m.b.H. v. Schenkers (1927) 1 KB 826.
Lockyer v. Buckhurst Park Properties (Mangal) Ltd. (1964) 2 QB 480
Morris v. Kanssen (1946) AC 459
Rolled Steel Ltd. v. British Steel Corporation (1986) Ch 246
Ruben v Great Fingall Consolidated (1906) AC 439
The Royal British Bank v. Turquand (1856) 6 El. and Bl. 327 (119 ER 886).
Uxbridge Permanent Benefit Building Society v. Pickard (1939) 2 KB 248
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