Contractual Transaction Of Northside Developments Pty Limited

Question: Discuss about the Contractual Transaction Of Northside Developments Pty Ltd. Answer: Issue The primary issue in context of this case study is that whether the third party has the right to rely upon assumptions which can be made in relation to the internal management of the organization while getting into a contractual transaction. Rule The primary rule which is applicable in situation of making an assumption while entering into a transaction with a company has been provided via the ruling of the land mark case of The Royal British Bank v. Turquand (1856) and is famous and commonly known as the indoor management rule. The provisions of this rules signifies that the any person who gets into a dealing with a person acting on behalf of the company has the right to assume that the person has complied with all the internal regulations and requirements of the organization. However the rule cannot be applied in all circumstances and there have been many situations where the court have considered that the indoor management rule is not applicable in the provided circumstances. These cases as and the ruling and reasoning provided by the judges are as follows. One of the primary reasoning which had been provided by the court in relation to the application of the indoor management rule has been given through the case of Morris v. Kanssen (1946) AC 459. In this case taking into consideration the circumstances it had been reasoned against the applicability of the indoor management rule that the rule has been brought to existence for the purpose of addressing the issues which are faced a third party while getting into a transaction with a company but the application of the rule does not give power to a person to rely on it in an unreasonable manner. This means that in situation where a reasonable person would have the idea of making an inquiry due to the suspicion incurred by him, he has to make that inquiry and cannot merely rely upon the application of this rule. The inquiry has to be made towards the verification of the authority of the person who is purporting to act on behalf of the organization. The circumstances in which an inquiry would have been made by a reasonable person had been duly discussed in the famous case of E.B.M. Co. Ltd. v. Dominion Bank (1937) 3 All ER 555. In this case the judge ruled that an inqury has to be made by a reasonable person on the basis of the very nature of the dealing he is entering into even in circumstances where such person is in no special relationship with the company. These provisions have been also successfully discusses and applied in the case of A.L. Underwood Ltd. v. Bank of Liverpool (1924) 1 KB 775. The rule had been adjudged to be inapplicable in situation where there was an element of forgery as duly discussed in the case of Kreditbank Cassel G.m.b.H. v. Schenkers (1927) 1 KB 826. In this particular case the judge had made a ruling that the doctrine of making assumption can be applied in circumstances which have the element of irregularity which may have had an impact on the dealing otherwise in a bona fide manner and the application is strictly prohibited in situation where there is an element of forgery. Another case which such provisions were applied is the case of Ruben v Great Fingall Consolidated (1906) AC 439. However there are circumstances in which forgery cannot be utilized as a proper exception to the Indoor management rule. These have been stated through the case of Uxbridge Permanent Benefit Building Society v. Pickard (1939) 2 KB 248. Here the court had held the organization liable even where the agent had indulged into a transaction though fraud. The point which has to be however noted in relation to this case is that there was no common seal of the organization which had been used for the purpose of getting into the transaction. In situation where the very authority or power of the officer acting on behalf of the organization is subjected to the risk of being delegated under the provisions of the articles of association the indoor management rule can be applied. The reasoning had been provided by the judge in Houghton and Co. v. Nothard, Lowe and Wills (1927) 1 KB 246. It was further added to by the judge while making this ruling that the transaction entered into by the organization would be binding on a the company even in situation where the officer has acted beyond the authority provided to him until the third party had the knowledge of such authority being exceeded or no authority existing or having a reason to make further inquiry. The indoor management rule had been held to be subjected under the principles of the law of agency as ruled in the case of Crabtree-Vickers Pty. Ltd. v. Australian Direct Mail Advertising and Addressing Co. Pty. Ltd. (1975) 133 CLR 72, in addition the applicability of the rule depends upon the ostensible or actual authority of a person who purports to act on the companys behalf. The transaction in relation to this case had been held as not binding the organization if it has been prohibited by the constitution. Although the case did not make a ruling in relation to transaction involving the use of the common seal these provisions are no longer applicable as per section 124 of the Corporation Act. Where any director or officer of the organization has been found to negligent in relation to their duties they cannot uses such negligence as a shield to evade the application of the indoor management rule. This reasoning in favor of the application of the rule had been given by Bank of Ireland v. Evans' Trustees (1855) 5 HLC 389 (10 ER 950). In this case the secretary had committed fraud to enter into a dealing to by using the common seal of the company. He got access to the seal due to the negligence of the director. The court held that the dealing is binding on the company. Application The issues in relation to the case have already been identified which is the application of the indoor management rule. The above discussed rules suggest the situation in which the indoor management rule can be applied and disregarded. These rules have to be applied to the facts of the case in order to come to an reasoned conclusion. In this case the registrar general had allowed a mortgage in relation to a transaction which has not been entered into by the organization (NORTHSIDE DEVELOPMENTS PTY. LTD) in a proper manner. The transaction has been approved by a person who purported to act as the company secretary of the company but in reality he was not. In this situation there was alleged knowledge on the part of the director that there was some kind of discrepancy in relation to the authority of the company secretary. As per the indoor management rule it can be stated that the third party who is the registrar has the right to make an assumption with respect to the transaction that the person acting on behalf of the company has complied with all requirements in relation to internal management of the organization. the person is deemed to have authority in the given situation by the third party as per the --- case. However there are various exceptions to this rule, these exceptions thus have to be applied in the given facts of the case. The first exception which is going to be applicable is Morris v. Kanssen. Here the primary reason for the non applicability of the indoor management rule was that where a reasonable person would have the idea of making an inquiry due to the suspicion incurred by him, he has to make that inquiry and cannot merely rely upon the application of this rule. The inquiry has to be made towards the verification of the authority of the person who is purporting to act on behalf of the organization. in this situation the transaction has been approved by a person who purported to act as the company secretary of the company but in reality he was not. In this situation there was alleged knowledge on the part of the director that there was some kind of discrepancy in relation to the authority of the company secretary. Thus it was the duty of the registrar general to make an add itional inquiry in relation to the authority of the company secretary which was actually not done in this case. Further it can be stated that the registrar general attempted to rely on the rule in an unreasonable manner and thus the application of the rule in the given situation would not be fair. Through the application of the principles which have been stated above in the case of Kreditbank Cassel G.m.b.H. v. Schenkers it can be determined that the rule cannot further be applied. This is because the assumption which had been made by the respondent in this situation was not carried out in good faith. In addition through the application of Ruben v Great Fingall Consolidated where it had been stated that doctrine of making assumption can be applied in circumstances which have the element of irregularity which may have had an impact on the dealing otherwise in a bona fide manner and the application is strictly prohibited in situation where there is an element of forgery, it is evident that the application of the indoor management rule should not be done in this case. There was clear evidence which was present in this case which suggested that there was an attempt to appoint the son of the director in the position of the company secretary of the company. The person was thus actually not the company secretary of the company when the dealing had actually been entered upon into. Thus the court will be correct in relation to the findings that the dealing has not been properly conducted in terms of execution of the documents and thus is invalid. In addition a reasonable person who had the knowledge about such situation in the position of the respondent would have taken addition measures to verify or make inquiries in relation to the authority of the company secretary. Conclusion Thus in the given situation it can be evidently concluded through the application of the above discussed rules that the application of the indoor management rule in this case to protect the respondent should not be done. References A.L. Underwood Ltd. v. Bank of Liverpool (1924) 1 KB 775 Bank of Ireland v. Evans' Trustees (1855) 5 HLC 389 (10 ER 950) E.B.M. Co. Ltd. v. Dominion Bank (1937) 3 All ER 555, Kreditbank Cassel G.m.b.H. v. Schenkers (1927) 1 KB 826. Morris v. Kanssen (1946) AC 459 Rolled Steel Ltd. v. British Steel Corporation (1986) Ch 246 Ruben v Great Fingall Consolidated (1906) AC 439 The Royal British Bank v. Turquand (1856) 6 El. and Bl. 327 (119 ER 886).