The Royal British Bank v. Turquand (1856)

Constructive notice is the rule that anyone dealing with a company is taken to have read its public documents. Standing alone it would be intolerable: the outsider would also have to satisfy himself that every internal step the documents require — a resolution, a quorum, a sanction — had actually been taken, and he has no means of finding out.

Turquand supplies the counterweight, and it does so in one sentence: the outsider is bound to read the public documents, but he is not bound to do more. Where the documents show a permission subject to an internal condition, he may assume the condition was satisfied. Every problem in this area is a question about which side of that line the defect falls on.

The company was Cameron's Coalbrook Steam, Coal, and Swansea and London Railway Company, completely registered under stat. 7 & 8 Vict. c. 110. It was formed for the purpose of carrying on mining operations and forming a railway. Turquand was sued as its official manager under the Joint Stock Companies Winding up Acts.

On 6 March 1850 the company, by its writing obligatory sealed with its common seal, acknowledged itself bound to the plaintiffs, who were bankers, in £2,000. The condition of the bond was to secure to the bankers such sum as the company should, to the amount of £1,000, owe them on the balance of the account current from time to time, and to indemnify them to that amount against losses incurred by reason of the account. The bond was signed by two directors and sealed with the company's seal.

The money was not repaid, and the bank sued.

The plea. The company's answer set out the clauses of the registered deed of settlement. Under it the directors were authorised, in certain circumstances, to give bills, notes, bonds or mortgages; and one clause provided that the directors might borrow on bond such sums as should, from time to time, by a general resolution of the Company, be authorised to be borrowed. The plea then averred that there had been no such resolution, and that the bond was given without the authority or consent of the shareholders.

The replication. The bank set out the deed of settlement further, and alleged that at a general meeting of the company it had in fact been resolved "that the directors of the said Company should be, and they were thereby, authorized to borrow on mortgage, bond or otherwise, such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the provisions of the deed of settlement and Act of Parliament", and that the resolution remained unrescinded. It further alleged that the directors, acting on that authority, agreed to enter into the bond, appointed two directors to affix the seal and the secretary to sign, and that the bank took the bond "in full faith and belief of the validity of the said resolutions".

There were demurrers to both the plea and the replication.

Counsel put the constructive-notice case at its highest, and it is worth setting out because it is the argument the case defeats.

The statute limits the powers of the company to acts authorised by the deed of settlement; the deed limits the directors' power to borrow on bond to cases authorised by a general resolution; the plea says there was no such resolution; therefore the bond, sealed without authority, is not the bond of the company at all. Dealing with a joint-stock company, he argued, is not like dealing with an ordinary partnership, where each partner has a prima facie authority to bind the firm which cannot be cut down as against outsiders by a private agreement among the partners. Here the company "have no power besides what the statute confers", the statute refers to the deed, and so — the crucial sentence — "The plaintiffs were bound to know the statute and the contents of the deed of settlement."

He added a fallback: even taking the replication at face value, the resolution it set out did not satisfy the deed, because it did not specify the sum to be borrowed.

1. Was the bank fixed with notice not only of the deed of settlement but of whether the internal resolution it required had actually been passed?
2. Did a resolution authorising the directors to borrow such sums as they might deem expedient, without naming an amount, satisfy the deed?

Judgment for the bank; the judgment of the Queen's Bench affirmed. The bond bound the company.

Jervis CJ dealt with the second question first and disposed of it as an inclination rather than a holding: his impression, though he would not state it as a fixed opinion, was that the resolution set out in the replication went far enough to satisfy the requisites of the deed. The deed allowed the directors to borrow such sums as should by a resolution be authorised to be borrowed; the replication showed a resolution authorising them to borrow such sums, for such periods and at such rates of interest as they might deem expedient, in accordance with the deed and the Act, without otherwise defining the amount. "That seems to me enough."

He then decided the case on the first question, and this is the passage to know. He conceded the whole of constructive notice — dealings with these companies are not like dealings with other partnerships, and "the parties dealing with them are bound to read the statute and the deed of settlement." And then he stopped it dead: "But they are not bound to do more."

The reason follows immediately from the shape of the document. 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 fact of the document appeared to be legitimately done."

(fact in that last clause is the report's rendering of face; the sense is what appeared on the face of the document.)

A person dealing with a company is fixed with notice of its registered public documents, but is not bound to inquire whether the internal proceedings those documents require have in fact been carried out. Where the documents disclose a power exercisable on the fulfilment of an internal condition, he is entitled to assume that the condition has been fulfilled.

The rule is not an indulgence to careless lenders. It is a rule about the division of informational labour, and it allocates each risk to the party who can bear it.

What the company has published — its constitution, its objects, the extent of its directors' authority — the outsider can read for the cost of a trip to the register. So he is made to read it, and if he lends in the teeth of a limit written on the face of those documents he loses.

What happens inside the company — whether a meeting was held, whether a quorum was present, whether a resolution was passed and in what terms — the outsider cannot discover at any price. The company can. So the risk of an internal irregularity is left with the company, which can prevent it, rather than with the stranger, who cannot.

Read that way, constructive notice and indoor management are not competing doctrines but two halves of one rule. That is why the exceptions to Turquand are all cases in which the outsider either could have seen the defect or actually knew of it: knowledge of the irregularity; circumstances putting him on inquiry; forgery, which is not an irregularity but a nullity; an act outside the apparent authority of the officer; and a limit visible on the face of the public documents.

Put Turquand beside Kotla Venkataswamy v. Chinta Ramamurthy.

• In Turquand the outsider read the deed and found a permission subject to an internal condition. He could not check the condition, so he could assume it.
• In Kotla the articles required a deed to be signed by three named officers. The bond carried two signatures. The outsider could count. The defect was on the face of the transaction, not inside the company, and the mortgage failed.

Curgenven J in Kotla stated the distinction in terms, describing Turquand as a case where the directors exceeded their authority as between themselves and the shareholders, "but this was not known to the plaintiffs and no illegality appeared on the face of the bond, nor were the share-holders prejudiced", and adding: "If an illegality does appear on the face of the bond, the plaintiff will not be thus protected."

The Companies Act 2013 supplies the constructive-notice half of the equation by making the memorandum and articles registered public documents which, under s. 10(1), bind the company and the members "to the same extent as if they respectively had been signed by the company and by each member". The indoor-management half remains a rule of judge-made law, applied in India in the same terms.

Two neighbouring statutory rules should be noticed because they show Parliament choosing sides. Section 80 gives statutory constructive notice of a registered charge to every person acquiring the property — the outsider is fixed with what the register says. Section 180(5), by contrast, provides that a debt incurred beyond the borrowing limit is not valid "unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded" — here the outsider is protected, but only if he discharges a burden, because the borrowing limit is computable from published accounts. The scheme is Turquand with the burden allocated expressly.