Administrative Law

Turquand Rule (Indoor Management Rule)

A rule protecting third parties who deal with a company in good faith — they are entitled to assume that the company's internal procedures have been properly followed, without needing to investigate.

Legal Definition

The Turquand Rule (from Royal British Bank v Turquand [1856]) protects innocent third parties who contract with a company. A third party dealing in good faith can assume that all internal formalities (board resolutions, shareholder approvals) required by the company's constitution have been complied with. The Companies Act 71 of 2008 codifies and extends this protection. Third parties cannot be prejudiced by internal irregularities they could not reasonably have known about.

📖 Constitutional / Statutory Basis: Section 22 (right to freedom of trade)

Practical Example

A bank lends money to a company on the basis of a board resolution authorising the loan. Later it emerges that the resolution was not properly passed. The bank can rely on the Turquand Rule — it is protected against the company's internal defect.

Frequently Asked Questions

Does the Turquand Rule protect a director contracting with their own company?

Generally no — the rule protects outsiders, not insiders. A director is an insider who knows (or should know) the company's internal procedures. Directors cannot rely on the Turquand Rule when they were party to the internal irregularity.

Is the Turquand Rule codified in the South African Companies Act?

Yes — section 20(7) and related provisions of the Companies Act 71 of 2008 codify the principle that the company cannot deny the authority of a person to act on behalf of the company if the third party dealt in good faith.

Related Terms

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