The Main Issue
The Northside Developments Pty Ltd v Registrar-General (1990) is decided by The High Court of Australia by Mason C.J., Brennan, Dawson, Toohey and Gaudron JJ.
As per the facts, the Appellant is the company which was established in 1965 with the main aim to hold a land at Frenchs Forest (Sydney) under the Real property Act 1900 (N.S.W) and is the registered proprietor of such land. The directors of the company were Robert Sturgess, John Lees and Robert Ellis,. The shareholders of the Appellant were John Lees, Robert Ellis and Rogard Pty. Limited (Robert Sturgess controls the company).
The Registrar –General was the First Respondent. Robert Sturgess and Gerard Sturgess were second Respondents.
The facts reveal that, on 14th November 1979, Mr Horder (an accountant and secretary of the Appellant) resigned and on the same day Robert Sturgess requested his son Gerard Sturgess to act as the Company Secretary of the Appellant to which he consented. On 20th November 1979 the change in the secretary was filed to the Corporate Affairs Commission via a statutory return. John Lees and Robert Ellis were not aware of the change. (Birds & Boardman, 2010)
The Appellant executed a mortgage of the land on 24th December 1979 under the common seal and in favor of the Barclays Credit Corporation Holdings Pty. Limited ("Barclays"). The instrument was to attain a loan amount of $1,400,000. The loan amount was issued by Barclays to the companies (s) controlled/owed by Robert Sturgess. There is no interest which is secured by the appellant in the companies to which the loan was granted. On 20th May 1980 the mortgage was registered.
However, there was default in the payment of the loan amount and Barclays sold the land in auction and the purchaser becomes the registered proprietor of such land.
Later the Registrar- General was sued by Appellant under section 127 of the Act for damages on the pretext that no mortgage instrument was executed by the Appellant.
The Main Issue
The main issue that arose was whether Barclays (Third party) was obligated to go behind the seal and the signatures of the company officers prior entering into any contract with them.
The Directors of the appellant company was found to be in violation of the fiduciary duty
Court of Appeal
The Court of Appeal allowed the appeal of the Registrar-General.
It was held by Kirby P, that the rule of indoor management is a special rule which deals with company and cannot be only associated with the general law of agency. It was held that there is no need to put Barclay upon inquiry and the rule of Royal British Bank v Turquand (1856) must be applied with full force. The court held that no attempts are made by the appellant to prevent Gerard Sturgess from acting as the company secretary of the Appellant and thus there is no need to out Barclay upon inquiry.
Duties And Responsibly Violated
The Appellant argument, that is, even though Barclay cannot be put on inquiry but still the Indoor Management rule is not applicable in cases of forgery (since the mortgaged instrument that was executed was a forged document) was out rightly rejected by the Court of Appeal mainly because they did not consider that forgery should be consider to be an exception to the rule and held that though the rule has no application in cases of forgery but the situation is different when the signatures are genuine but is without authority.
Based upon the above reasons, the appeal of the Registrar –General was thus upheld. (Schenone, 2013)
There were two main contentions that were raised by the Appellant:
- That Barclay must be out upon inquiry;
- That the rule of Indoor Management has no application in cases of forged document.
Whereas it was argued by the Respondent that:
- Barclay can assume that the seal that was affixed and the authority of the Appellant to execute the instrument is valid;
- That there was no facts which depicts of any irregularities upon Barclay;
- That the forgery exception is not applicable in the given situation.
i. That the mortgage instrument that was executed by the Appellant was bearing the common seal of the Appellant. The document was executed by Mr Sturgess who was the director of the company. Mr Sturgess while executing the mortgage also attested the seal. The instrument also bore the signature of the company secretary, Gerard Sturgess, who was the son of Mr Robert Sturgess.
Article 56 of the Articles of Association of the Appellant specifically submits that when any seal of the Appellant is to be affixed then the same must be signed by one Director or company secretary or second Director or any person who is appeared by the Director for such purpose. This Article was subject to Article 47 which permits the directors to delegate their powers to a committee of directors.
The court held that Article 56 was not fulfilled by Robert and Gerard Sturgess when they signed they instrument and fixed the common seal of the company. Mainly because there is no resolution that was passed by the company directors which authorizes with neither the requirement of affixing the seal to the instrument nor any power of the same was delegated to Robert Sturgess. Also, no other directors apart from Robert Sturgess approved of the execution of the mortgage instrument.
Further, Gerard Sturgess was not in reality was the company secretary of the Appellant. When the previous secretary resigned on 14 November 1979, at that time Gerard Sturgess signed a letter consenting to act as secretary and this appointment was signed by Robert Sturgess and was sent to Corporate Affairs Commission on 22 November 1979. But, this entire act is not within the knowledge of the other directors.
Decision Of The Court And Reasons
The Judge at first instance, Young J, held that the appointment of Gerard Sturgess is invalid in nature and which was assented by the High Court of Australia.
ii. The interpretation of the Indoor Management Rule (Case Notes, 1990)
By quoting two leading judgments of Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd & Anor (1964) and Crabtree Vickers Pty Ltd v. Australian Direct Mail Advertising and Addressing Co. Pfy Ltd (1975), it was submitted by the Chief Justice that the rule that was established in the Turquand's case is mainly to govern the relationship of a principal and the agent wherein agent acts with his actual or ostensible authority and bind the principal by his actions.
He pointed out the reasoning of McHugh J.A, that is, the rule that is laid down in Freeman & Lockyer has not established anything regarding those instruments which are executed by the company under the common seal. He agreed with McHugh J.A and submitted that when the instruments are executed then the rule in Turquand's case is 'an organic principle of the law relating to corporations'.
All the court members felt that the rule of Indoor Management must be applied in all cases regardless of the fact whether the seal of the company was involved or not.
iii. Both Mason C.J. and Brennan J. agreed that the rule of Indoor Management is not static and can be moved when the situations are such which put the party on inquiry who is relying on the rule.
Mason C.J submitted that the rule provide protection to those innocent lenders who are dealing with companies in order to promote business. There is a fine line amid the competing interest of the parties. the rule is manly developed to protect those lenders who are at continuous stress of checking the internal proceedings of the companies and to check whether the officers are authorized or not before lending and also to protect those creditors and shareholders who are at receiving end because of the over use of the rule which resulted in causing fraud by the lenders under the shield of the rule. In order to resolve this interest, it is necessary that the lenders must be put on inquiry when they are dealing with the companies who are entering into transactions which are not related to their usual business activities is the right approach to strike a balance. By achieving such balance the lender will act much diligently and prudently prior lending anything to such companies.
Court of Appeal
However, there were no circumsttbces that were laid down by the CJ under which the lender was to put under inquiry. But some matters include the nature of the business, the company powers, the relation amid the transaction so entered and the nature of business, the actual or ostensible authority of the officers with whom the lender is dealing, etc
The court submitted that even though the instrument was sealed, countersigned and attested but the same are carried out but without authority. The instrument which was provided to Barclay was not for the purpose of the business of the appellant nor was the same provided for the benefit of the Appellant. The main reason for providing the loan was to secure the dents of the companies of Robert Sturges. These facts are enough to put Barclays under inquiry prior lending any money to the Appellant.
It is the third party who has been put upon inquiry and thus the Turquand's case rule is not applicable to stop the Appellant from showing that how the instrument executed by it is not its instrument.
iii. Gaudron J established that the Rule of indoor management cannot be applied to the facts of the given case mainly because the directors who are dealing on company behalf are mainly incurring fraud on the company. The directors were not representing or acting on the company behalf rather, there is nothing which shows on the part of the company that the director ere authorized to act on the behalf of the company. It has been depicted that the appellant has not contributed or has become part of the forgery thus the Appellant is not estopped and can prove that the seal or the affixations that are made on its behalf are nothing but to defraud.
The conduct of the company establishes that Barclay must be out on inquiry. There is nothing to show that the Appellant has provided any kind of authority to Robert Sturgess under which it can sale the land on his own behalf. There us no actual or apparent authority that was provided to him by the Appellant and the same was assume by him on his own.
The seal that is affixed by Robert Sturgess was nothing but an act of forgery. Because of these treasons there cannot be any application of the rule laid down under Royal British Bank v. Turquand.
iv. The court held that the rule in Turquand's Casesimply establishes that when any outsider is dealing in good faith with the company can assume that its internal proceedings and constitutional provisions must be performed with and he is not duty bound to make any internal inquiries and relied on the decision of Morris v. Kanssen (1946) . But, if the transaction is one which is beyond the scope of the nature of the business of the company then the outsider can be put upon inquiry before proceeding any transaction with the company and relied upon the decision of B.M. Co. Ltd. v. Dominion Bank (1937) ; A.L. Underwood Ltd. v. Bank of Liverpool (1924) and Rolled Steel Ltd. v. British Steel Corporation (1986).
In the given case it is necessary to put Barclays upon inquiry especially because the document was signed by the company secretary who is not authored to sign the document and there is no evidence which shows that any authority is provided to him by any actual or apparent actions of the directors of the Appellant.
v. When the loan was provided then the same was for the companies of Robert Sturgess with which the Appellant company has no associations or apparent connection amid them. n assumption was drawn by Barclay that the document that was executed is valid. However there were no searches made by Barclay prior granting the loan. If the searches would have been made then the truth of the matter would have been disclosed and thus under such situation Barclays must be put upon inquiry.
DecisionThe High Court of Australia allowed the Appeal of the Appellant with costs and the orders that are made by the Court of Appeal were set aside.
J, Birds & N, Boardman (2010) Annotated Companies Legislation, Oxford University Press.
S, Schenone (2013) Duties and Responsibilities of Directors and Company Secretaries in New Zealand (4th edition). CCH New Zealand Limited.
A.L. Underwood Ltd. v. Bank of Liverpool (1924) 1 KB 775.
Crabtree Vickers Pty Ltd v. Australian Direct Mail Advertising and Addressing Co. Pfy Ltd (1975) 7 A.L.R. 527.
E.B.M. Co. Ltd. v. Dominion Bank (1937) 3 All ER 555
Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd & Anor (1964) 1 All E.R. 630.
Royal British Bank v Turquand (1856) 6 E&B 327.
Rolled Steel Ltd. v. British Steel Corporation (1986) Ch 246.
Morris v. Kanssen (1946) AC 459
Northside Developments Pty Ltd v Registrar-General (1990)
Case Notes (1990) (Online). Available at: https://188.8.131.52/au/journals/MelbULawRw/1990/25.pdf. (Accessed on 26th May 2017).
Northside Developments Pty. Ltd. V. Registrar-General (Online). Available at:
https://jade.io/article/67573. (Accessed on 26th May 2017).
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