Royal British Bank v. Turquand (Case Summary)

This landmark case of company law establishes the doctrine of indoor management. Opposite to the doctrine of constructive notice, this doctrine protects the outsider against the company so it is not prejudiced by the non-compliance of regulations in the indoor working of a company.

Facts of Royal British Bank v. Turquand

1. The Royal British bank gave a loan to the plaintiff company. The company issues a £2000 bond as a security towards the loan.
2. The company went into liquidation and Turquand was appointed as the liquidator of the company.
3. The company denied the liability of the loan by the Royal British bank alleging that their Articles of Association mandated a general resolution to authorize the directors to borrow money.

Issues framed

1. Whether it was the duty of the Royal British Bank to check whether a resolution has been passed to authorize the directors to borrow the loan.
2. Whether the loan given is valid and enforceable?

Judgment of Royal British Bank v. Turquand

The court held that it was not mandatory for the Royal British Bank to check whether the resolution to authorize the directors was passed or not. The court established the doctrine of indoor management and held that passing any internal resolution is indoor management of a company and can not be considered as a constructive notice. 

The rule of constructive notice is only applicable to public documents. If a company enters into a contract, it can be presumed that the company has complied with the internal regulations of the company. Hence, there can be no prejudice against the bona fide party. The company was held to be bound by the loan and the validity of the contract was upheld.