The Gazette 1985

GAZETTE

JANUARY/FEBRUARY 1985

The Indoor Management Rule

in Ireland

Gerard McCormack, B.C.L., LL.M.

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.

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.

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

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.

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