The Gazette 1985

JANUARY/FEBRUARY 1985

GAZETTE

The Indoor Management Rule in Ireland by Gerard McCormack, B.C.L., LL.M.

S ECTION 8 of the Companies Act, 1963 validates an ultra vires act or thing done by a company in favour of any person relying on such act or thing who is not shown to have been actually aware, at the time when he so relied thereon, that such act or thing was not within the powers of the company. The section deals with transactions beyond the objects of a company. A company, however, can only act through agents. These agents are normally directors of the company who are entrusted with various powers under the articles of association of the company or by an authority conferred under the articles. An act may be within the objects of the company but outside the authority of the directors (or other agents). In this case the person doing business with the company may be able to rely on regulation 6 of the European Communities (Companies) Regulations 1973' or on the rule in Royal British Bank-v- Turquand} In this article the rule in Turquand's case will be specifically isolated and examined. Some consideration will also be given, however, to the 1973 Companies Regulations insofar as the scope of protection thereunder is wider than that available under the principle enunciated in Turquand. In the interests of the efficient operation of the market place an outsider transacting business with a company need not investigate matters of internal management according to the rule in Royal British Bank -v- Turquand. In favour of such a person, provided he acts honestly, appearances should be imprinted with the aura of reality. This may be regarded as an application of the principle omnia praesumantur rite ac solemniter esse acta and forms a cornerstone of commercial law. There is another logical foundation for the rule in that a person has no right to insist on proof by the directors that the provisions of the memorandum and articles of association have been complied with, and he cannot therefore be deemed to have constructive notice of some failure to comply which he has no means of discovering. 3 Ulster Investment Bank Ltd. -v- Euro Estates Ltd. The so-called indoor management rule was discussed in this jurisdiction by Carroll J. in Ulster Investment Bank Ltd. -v- Euro Estates Ltd. 4 In that case the bank stipulated prior to granting secured credit, that their solicitors should have received and approved Euro Estates Ltd.'s memorandum and articles of association and certificate of incorporation and copies of various board resolutions authorising the borrowing thereunder. The company's articles of association stated that two directors should be sufficient to form a quorum provided that a quorum should contain at least one " A " director and one " B " director. The directors were empowered to exercise all the powers of the company to borrow and secure money without any limit as to amount and regulation. Article 79 of Part I of Table A was modified accordingly. In relation

to affixing the seal of the company the articles incorporated regulation 115 of Part I of Table A which states that the seal shall be used only by the authority of the directors or of a committee of the directors authorised by the directors in that behalf. The liquidator of Euro Estates Ltd. sought to have a mortgage set aside on the grounds that there was no valid directors' meeting to approve the contents of the mortgage and to authorise the affixing of the seal because there was not a valid quorum present. There were only two " B " directors present. He argued that the bank ought to have been aware that it was an invalid meeting because they had a copy of the shareholders' agreement and of the memorandum and articles of association of Euro Estates. Also it was a condition precedent to the loan that they should have received and approved copies of the board resolutions authorising the borrowing. Carroll J. reacted unfavourably to these submissions and the case of County of Gloucester Bank -v- Rudry Merthyr Steam and House Coal Colliery Company 5 was invoked to defeat the liquidator's claim. There the directors of a joint-stock company had power under the articles of association to fix a quorum, and by a resolution they fixed three as a quorum. A meeting of the directors, at which only two were present, authorised the secretary to affix the company's seal to a mortgage , which was accordingly done by the secretary in the presence of the same two directors. It was held that as between the company and the mortgagees, who had no notice of the irregularity, the execution of the deed was valid. Lindley L.J. expressed himself in trenchant terms. He said: If a person looked at the deed, and looked at the articles, he would not see anything irregular at all; he would be at liberty to infer, and anyone in the ordinary course of business would infer, that if the directors had appointed a quorum they appointed the two who signed that deed. But supposing that three were wanted, he is not bound to go and look at the directors' minutes; he has no right to look at them except as a matter of bargain. The directors' minutes, unless he knows what they are, do not affect him at all. There is nothing irregular on the face of the deed, even taken with the articles — there is nothing illegal in it. 6 This passage was regarded by Carroll J. as highly relevant to the facts before her, for in this instance the deeds appeared on the face of them to have been executed in accordance with the provisions of the articles in that the affixing of the seal had been counter-signed by two directors. In the ordinary course of events a mortgagee dealing with a company was not obliged to call for copies of resolutions appointing directors or authorising the 17