3. ORGANISATION OF THE PRESENTATION
Introduction of Indoor Management Rule
Explanation of the rule on the basis of commercial law
Local examples
Lessons and recommendations
Conclusion
4. INTRODUCTION AND BACKGROUND
The fundamental principle is that indoor Management Rule handles
dealings between the company and its third parties.
Indoor Management Rule has been defined based on judicial precedence
in this presentation.
The definition of indoor management rule is derived from an English case;
The Royal British Bank vs Turquand [1856].
The rule in Turquand’s case states that a company will only be bound by
the acts of a person who purports to act on its behalf as a director if he
was appointed as such and was acting within his authority; thus if he was
not appointed as a director and was not held out as having authority to
bind the company, the company cant not be held liable for his acts.
5. However, if he is appointed but lack authority, his acts may still more bind
the company.
The absence of appointment and authority will not affect a third party
unless the third party knew or ought to have known that the said director
had no authority.
A third party is protected because he is not bound to enquire whether or
not the company has not followed its internal rules.
Simply put, it is a common law rule according to which persons may
assume that acts of internal management affecting the business dealings
that they have with a company in good faith have been conducted in a
regular way so that any contract entered into are valid.
6. MAIN ISSUES IN TURQUAND CASE
The Memorandum of articles of a company indicated that
directors could borrow money after authorisation by the
general meeting.
The director borrowed money from the plaintiff bank without
authority.
It was held that what they did was clearly inconsistent with the
constitution of the company.
The directors were deemed to operate within company
requirements by outsiders, the company was bound by the
loan.
7. The bank being a third party, was not bound to check whether the
directors were operating within the required internal business processes
of the company.
A third party is entitled to infer / assume a fact that the company
complies with its constitution in its dealings.
8. LOCAL EXAMPLES WHERE INDOOR MANAGEMENT RULE HAS APPLIED
National Bank of Malawi Vs Dairiboard Malawi Ltd [2008)
MLR (Com) 45. where a managing director for the defendant
took a loan from the plaintiff bank guaranteed by the
defendant company.
The guarantee was signed on behalf of the defendant but the
managing director and the company secretary.
The defendant company denied liability as a guarantor
claiming that those who signed it did not have authority and
that such guarantees were supposed to be ratified by the
defendants board and under its articles of association.
9. It was held that the defendant was liable since where an outsider entered
into a contract with a company through its directors in good faith without
knowledge that the directors had no authority from the company to enter
into the transaction in question, the contract was still binding on the
company.
10. Mulli Brothers Ltd Vs National Bank of Malawi Com Case No 92 of 2016.
The argument was the loan was not binding on the company because a
board resolution was not passed was rejected by the court.
The rule failed to operate in favour of an insider, in this case a
managing director because he was deemed to know of any irregularity
in the internal management of the company.
The court also referred to the case of National Bank of Malawi Vs Dairy
Board Malawi Ltd MLR [2008].
The instant case has material similarity in fact with the Dairy Board
case.
11. In both cases the companies pressed emphasis on the board resolution
in order to procure a loan, yet in both case the loan agreement did not
contain such provisions as term and conditions for the contract.
In other words in construction of contracts it is the terms and conditions
that guide the parties’ conduct and the court decisions.
The law of contract is concerned with only legal obligations arising out
of an agreement between two parties.
In the instant case the plaintiff failed to show that a board resolution was
a term of the loan agreement.
The plaintiff in this case failed to convince to court on the in door
business rule.
12. Conclusion and recommendations
EXCEPTIONS TO THE RULE OF INDOOR MANAGEMENT
The rule has the following exceptions as it were in Turquand’s case.
1. The rule could only operate in favour of a person only acting in
good faith without notice of any irregularity.
2. The rule could not operate in favour of an insider for example the
Director could be deemed to know of any irregularity in the internal
management of the company.
3. The rule does not operate to protect outsiders from the
consequences of forgery.
13. In conclusion the indoor management rule implies that a person dealing
with a company in good faith is entitled to assume that a corporate act
provided for in the company’s documents have been properly and duly
performed in compliance with article and by laws.
