Royal British Bank v Turquand (1856) 6 E&B 327, also known as the Turquand's Case, is a landmark company law case that established the indoor management rule or the Turquand Rule to protect the rights of bona fide third parties who enter into transactions with a company, allowing them to be entitled to assume that internal company rules are complied with, even if this is not true.
The Royal British Bank lent money to a company called Cameron's Coalbrook Steam, Coal and Swansea and Loughor Railway Company which later became insolvent. The bank alleged that the directors of the company had exceeded their authority in borrowing the money because the company's articles of association allowed the company to borrow only up to an amount authorised by a company resolution. The bank argued that since the borrowing had not been authorised in the manner prescribed by the company's articles, the transaction was invalid.
However, the court held in favour of Turquand, who was the liquidator of the company, and established the concept of the indoor management rule. The rule states that a person dealing with a company is not bound to inquire into the company's internal affairs or ascertain whether the company has complied with its internal procedures. If the person dealing with the company acts in good faith and within the apparent scope of the company's authority, they can assume that all necessary internal procedures have been followed. Therefore, the bank was entitled to assume that the directors of the company had the authority to borrow money, even though the borrowing had not been authorised.
The decision in Royal British Bank v Turquand has had a significant impact on company law, providing protection to third parties who enter into transactions with companies, while mitigating the harshness of constructive notice. It recognises that it is impractical for third parties to investigate the internal workings of a company before entering into a transaction, and it allows them to rely on the external authority of the company's directors. However, it is important to note that the rule only applies to external transactions and does not protect directors who act fraudulently or dishonestly.