Northside Developments Pty Ltd: Case Study On Mortgage Execution And Indoor Management Rule

Question:

Write a report on Northside Developments Pty Ltd v Registrar-General.

Northside Developments Pty Ltd. was established in 1965 with the exclusive function of holding certain land in North South Wales in Australia. The company had been regulated three directors i.e. Robert Ellis, John Lees, and Robert Sturgess. All the three directors had the power to hold or control all the stakes of the company. On 14^th of November in 1979, Mr Horder, who was the accountant of the company, had also been holding the position of the secretary of the company, resigned the office. On the same day, Gerard Sturgess, who was the son of one of the directors, Robert Sturgess, signed the approval to act as secretary on the request of his father. A legal document for changing the secretary was signed by Robert Sturgess on 20^th of November in 1979 and then it was submitted to the Corporate Affairs Commission 2 days afterward. Neither Lees nor Ellis be acquainted with or approved this 'appointment'. In addition, it was not also became a reason of dispute, because of which, the supposed appointment of Gerard Sturgess as the secretary of Northside was invalid (Austlii, 1990).

The case is related to the mortgage which was executed by the plaintiff company, under its common seal on 24th of December, 1979 to Barclays Credit Corporation Holdings Pty. Ltd. The mortgage paper were signed on 28th April, 1980 and the mortgagee i.e. Barclay Company sold the land to Mr. Harvey on 31st December 1980 through auction. It was argued by the plaintiff that the company had not executed any mortgage so would not have been binding on it. Furthermore, the company argued that it was deprived of its land due to indefeasibility provisions of the Real Property Act, according to which, there is no provision of remedies under Section 126 of the Real Property Act, if the deprivation has not occurred due to the fraud of the persons who had obtained the registration, i.e. Barclays and Mr. Harvey and the remedy can only be obtained under Section 127 against Registrar General (CCH Australia Limited, 2017).         

Northside Developments was integrated in order to hold the land. The alleged mortgage was made over the land by Northside Developments through its common seal to Barclays so as to secure the payment of principle and interest under the loan made to the Barclays to other companies owned and controlled by Robert Sturgess, who was a director of Northside Company. The Northside had no interest in any of these companies and as the mortgage was registered, Barclays sold the land through the process of auction to the third party, who became the registered proprietor afterwards. Northside sued Robert Sturgess for the damages under Section 127 of the Act through compensation for the loss of its estate and interest in the land on the basis that it did not have executed the mortgage documents (Victoria Supreme Court, 1998).

Mortgage Execution and Legal Issues

As per Section 127 of the Act, the act permits a person who receives loss or damages as a result of registration of any person as proprietor of land, who is prevented by Act from bringing proceedings for possession or recovery, to take action against the Registrar General as nominal defendant for the recovery of damages (Bond University, 1990).

However, the registered articles of Northside had the provision in Article 56 provided which, the Directors of the company should protect the seal and it should be used by the authority of the Directors or otherwise, in presence of at least one Director, who shall sign every document to which the seal is attached and is required to be counter-signed by the Secretary or one more Director or by any other person appointed with the approval of the Directors for this purpose (Victoria University of Wellington Law Faculty, 1993).

The judgment of the court of appeal of New South Wales established that the mortgage could not be accomplished by the appellant and the type of the mortgage transaction was such as to require the lender to make investigations regarding the rights of Robert and Gerard Sturgess to arrive into the mortgage in the best interests of the company as well as to affix the common seal. In addition to it, Barclays had not made any enquiries (Tunstall Consulting, 2008). Thus, the court awarded the damages in favor of Northside, in the form of an order against the Registrar-General, in which it was stated that the Registrar-General will have to recompense the company for the cost of land. The Registrar-General appealed to the full Supreme Court on the basis of certain points that the plaintiff company was the cause of its own problems by lax administration.  On the other hand, the company had itself provided the authority to Robert Sturgess because of which, it was possible for him to conduct the transaction. Moreover, if the plaintiff had succeeded Robert Sturgess, who must be considered to be guilty of wrongful exercise of lawful authority, would had benefitted him. There was estoppel against the plaintiff in relation to Barclays, from alleging that the mortgage had not been properly executed by asset of the indoor management rule of the company (Chapple & Lipton, 2002).

It was agreed upon by the Court of Appeal that concerning the conditions essential for a party to be put upon inquiry and particularly, in this case, considerations pointed out by the company in order to explain that Barclays had been put upon inquiry were that the company regulated by Robert Sturgess, was in need of a loan and offered the land as security, of which he was not the owner. Above it, the security was the sole significant asset of the Northside Company, so the basic inquiry would have to be disclosed by the credit provider. Moreover, the loan provided to the company of Robert Strugess, secured by the mortgage was not associated with the business of Northside. The operative recipient of the mortgage i.e. Robert Sturgess was also the director of the mortgagor company i.e. Northside, of which, his son was the Secretary, who joined him in the execution of the mortgage, should have put Barclays informed of the possible irregularity. The transaction in this case was of the land title transference, in which a huge formality and extreme investigation was required (Australia High Court, 2004). It is in general a rule that for the purpose of transactions that involve the title of land, extreme investigations are performed regarding zoning, land tax, along with the authority of the company. Barclays or their solicitors should have performed such investigations before entering into transaction process.

Indoor Management Rule and Court Judgment

It was stated by the court that 'forgery' exception cannot be applied to the case because the signature on the transaction documents were genuine and, even if unauthorized, claimed to be that of a person holding the office in conditions where the actions taken by him were perfectly legitimate and standard.         

In this case, the issue was simply whether the company was prevented from presenting that the document of guarantee was sealed and witnessed without the authority. The documents of mortgage were provided to the Barclays not for the purpose of business with Northside and neither for the benefit of that company, but to secure the debts of the companies of Robert Sturgess, which was sufficiently adequate to put Barclays on inquiry. In view of the fact that the third party i.e. Barclays had been put upon inquiry, the rule functioned in Turquand's case could not be applied to prevent Northside from presenting that the documents of mortgage were not their documents. It was therefore stated that the appeal should be allowed and the court should decide whether Barclays had been inquired should be considered on the basis of nature of the transaction (The University of California, 1991).

After the analysis of the characteristic and possibility of the indoor management rule, the court stated that the rule cannot be applied, in which, there is a document sealed or signed in the best interests of the company is considered as a falsification (Morrison, 1996). In this case, it was nowhere found that Northside had deprived Robert Sturgess from having the authority to utilize its land in behalf of the company and the contract was finalized without the actual or clear authority of Northside, which is why, the utilization of the seal was considered to be as forgery (LawTeacher, 2017). It was stated to be needless to consider whether had there been superficial authority to bind the company, the applicability of the rule would have resulted in the form of a binding document.    

It was suggested that the rules of the company or the corporation should be specific in order to require satisfaction regarding the internal management procedures of the corporation that would involve usually unnecessary interference into its affairs and frequently, the exclusive presentation of evidences and proofs which, for the issues related to the corporation, would be entirely formal and will have no actual practical utility. That is why; the law does not usually require dealing with the company that the party so trading should be performed in a legitimate manner (Amazonaws.com, 2017).

Discussion and Conclusion

The contemporary English cases in the Court of Appeal which have been measured the Turquand rule as a use of organizational principles did not involve contracts where the company seal was attached to the document. The second thing is that there are few Australian decisions that deal with the company contracts under seal that have stated the rule in conditions that are self-governing of the organizational principles (Australian Institute of Banking and Finance, 1994). The provisions of the Companies Code of New South Wales, section 68A and section 68C exhibit that the legislatures of Australia do not admit the fact that the liability of a company for the unauthorized acts should be based solely upon the organizational principles.

It was also mentioned that the "positive corporate seal rule" is not an application of the agency principles but an individual rule of the company law. It was also to be mentioned that, for the use of the indoor management rule, it is essential to concentrate upon the behavior of the company itself instead of giving emphasis to the behavior of the third party trading with the company i.e. Barclays in this case (Adelaide Law Review Association, 1990). It was found by the court that the other two directors were least interested in operating the company because that had been unsuccessful preventing Gerard Sturgess from acting as secretary of the company and permitted only one director to operate the company, the company should be prohibited from declaring that the majority of its directors were not concerned about the issues that have affected the company.

In this case, the extent and clarification of the Indoor Management Rule was explained by the judgment given by the High Court of Australia. The relationship between the indoor management rule and the constitution of the company was established in a manner that the constitution of the company restricts the authorities of the persons executing the binding instruments or involving in the transactions on behalf of the company. The question of law whether the power could have been under the constitution was answered by the indoor management rule. This rule covers all the associations between the structure of the company as well as the particular act or omission performed by the officer or manager of the company in the process of transaction.

It was considered by the Chief Justice that the rule in Turquand's case should be regarded as an exceptional rule of company law, only in the cases, where the utilization of company seal has been involved. It provided an altered approach of the High Court towards cases related to indoor management. As per the Explanatory Memorandum associated with the Bill, which introduced Section 68A within the Companies Code, the purpose of various paragraphs of Section 68A(3) was to reaffirm the rule as well as the qualifications to the rule in Turquand's case. However, the extent to which Section 68A codifies the indoor management rule has not been mentioned which was not answered in this case as well (De Jonge, 1990).  The Code provisions might prove to be extensive in scope in comparison to the common law rule, in this manner downgrading the decision for the Northside for secondary effectiveness for third parties plaintiffs in search of depending upon the indoor management principles (New South Wales Law Reform Commission, 1993).

References

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