LEGAL PRINCIPLE: COMPANY LAW — Directors’ Duties — Authority of Managing Director to Bind Company — Indoor Management Rule
PRINCIPLE STATEMENT
The Managing Director has wide implied authority to carry on the company's business. Third parties dealing with a company are entitled to assume that internal proceedings are regular (indoor management rule) and may hold the company responsible for acts within the director's usual or ostensible powers.
RATIO DECIDENDI (SOURCE)
Per Iguh, JSC, in Spasco Vehicle and Plant Hire Company Limited v. Alraine (Nigeria) Limited (1995) NLC-1641989(SC) at pp. 18–19; Paras. D–A.
"The Managing Director of a company is generally invested with wide implied or apparent authority to carry on the company's business in the usual way and to do all acts and enter into all contracts necessary for that purpose. The principle is well established that while persons dealing with a company are assumed to have read the public documents of the company and to have ascertained that the proposed transaction is not inconsistent therewith, they are not required to do more; they need not inquire into the regularity of the internal proceedings — the indoor management, and may assume that all is being done regularly. Accordingly a third party may in appropriate circumstances be entitled to hold the company responsible for acts of the directors, though unauthorized, but within their usual or ostensible powers."
EXPLANATION / SCOPE
The indoor management rule (Turquand’s case) protects third parties dealing with companies. They need not inquire into internal compliance. The company is bound by acts within the director’s apparent authority. The principle applies even if the act was not formally authorised by the board. The third party must act in good faith. The rule promotes commercial certainty. The company may still be liable for unauthorised acts if within ostensible powers. The exception is where the third party knew of the irregularity. The principle is fundamental to company law.