Turquand’s Rule in Malaysia

Every company law student will stumble upon “Turquand’s rule” in the course of their studies.

This rule originated from the case of Royal British Bank v Turquand [1843-60] All ER Rep 435, where the Defendant intended to evade the liability of a £2,000 bond by pleading that there had been no resolution authorizing the making of the bond by two directors.

Introduction

Turquand’s rule or the “indoor management rule” was laid down to facilitate business dealings as a person dealing with a company in good faith is entitled to make certain assumptions about the regularity of the company’s internal affairs.

The Federal Court in Malaysia discussed the Turquand’s rule extensively in Pekan Nenas Industries Sdn Bhd v Chang Ching Chuen & Ors [1998] 1 MLJ 465 and Kang Hai Holdings Sdn Bhd & Anor v Lee Lai Ban (trading as the sole proprietor under the name and style of ‘Sang Excavating Services’) [2018] 2 MLJ 574. 

Turquand’s Rule in a Family Feud

The Pekan Nenas case concerned a dispute over the ownership of lands that stemmed from the breakup of a Singapore family.

The founder of Aik Ming (M) Sdn Bhd (“Family Company”) that owned the disputed lands was in a battle for control of the company with his first wife, who was supported by their children. The trigger of the family feud was the founder’s intention to marry his second wife, Rahimah, an employee who became the substantial shareholder and director of the Family Company. When the founder fled to Thailand and married Rahimah, each side held various board meetings and annual extraordinary meetings to gain control of the Family Company. In the absence of the founder and Rahimah, board meetings were held to:

• Remove the founder as Managing Director;
• Appoint three new Managing Directors;
• Declare Rahimah’s share certificates null and void; and
• Give the new Managing Directors the authority to sell the disputed properties and execute all relevant documents to give effect to any sale.

Subsequently, the Family Company sold the disputed properties to Pekan Nenas Industries Sdn Bhd (“Purchaser”). The founder and his second wife succeeded in setting aside the sale in High Court. The High Court held that the Purchaser could not rely on the Turquand’s rule, which was upheld by the Court of Appeal.

Upon further appeal, the Federal Court held that the Purchaser, being an outsider who did not have actual or constructive knowledge or means of discovering the irregularities had taken place in the internal management of the Family Company, could rely on the Turquand’s rule.

Turquand’s Rule in Fraud

In the Kang Hai Holdings case, the appellants, Kang Hai Holdings Sdn Bhd (“KHH”) and Kang Hai Realty Sdn Bhd (“KHR”), owned three plots of land (“Lands”).

A former director of the appellants, Siva, engaged the respondent (“Lee”) to extract earth from the Lands despite having ceased to be a director. Siva and Lee entered into a three-year tenancy agreement. Subsequently, the appellants’ director informed Lee that Siva did not have the authority to transact on behalf of the appellants. Despite this, Lee continued his work at the Lands. 

KHR and KHH filed a claim against Siva and Lee for fraud, forgery, trespass to land and conversion. The High Court and Court of Appeal held Siva liable, but the Court of Appeal held that Lee was entitled to invoke the Turquand’s rule.

Being dissatisfied with the Court of Appeal’s decision, KHH and KHR appealed to Federal Court. The Federal Court held that:

The Turquand’s rule cannot apply to a situation where an outsider dealing with a company was deemed to have constructive notice of the identity of the directors and managers of the company as set out in its Form 49; and

An outsider cannot rely on Turquand’s rule and principles of ostensible authority to bind a company where the ‘holding out’ or representation of authority was made solely by the person who had, in fact, no authority.

Therefore, Lee could not rely on Turquand’s rule without discharging the minimum duty of performing the necessary checks, such as land or company search. Thanks to the rapid development of modern technology, we can retrieve Form 49 of a company from the Companies Commission of Malaysia’s website. KL Engineering Sdn Bhd & Anor v Arab Malaysian Finance Bhd [1994] 2 MLJ 201 held that the common law doctrine of constructive notice is applicable to Form 49 as it is a public document. 

Premised on Kang Hai Holdings case, when one intends to deal with the company, all the necessary due diligence ought to be performed. Otherwise, we cannot ignorantly hide behind the Turquand’s rule, and fall trap into another’s fraud or negligence, incurring liabilities. 

The Companies Act 2016

The Federal Court’s ruling in Kang Hai Holdings has the effect of ensuring people to be more vigilant when dealing with companies. Although they may not be privy to the board meetings and resolutions made, they should at least equip themselves with all publicly available information of the companies. As such, it will reduce improper dealings resulting in disputes and litigation.

However, Kang Hai Holdings is ruled based on the Companies Act 1965, which has been overruled by Companies Act 2016. The new act introduced section 39, which states that the doctrine of constructive notice is not applicable save for the documents related to charges. 

Section 39, stipulates:

No person shall be deemed to have notice or knowledge of the contents of the constitution or any other document relating to a company, due to the fact—

1. that the constitution or document has been registered by the Registrar; or

2. that it is available for inspection at the registered office of the company,

with the exception of documents relating to instrument of charges.

Reading section 39 of Companies Act 2016, it seems to be at odds with the Federal Court’s ruling in Kang Hai Holdings. However, if the act or event complained of before 31 January 2017, the party’s right to rely on the doctrine may be preserved by the repeal and savings section 620(5) of Companies Act 2016. 

It would be interesting to see sections 39 and 620(5) of Companies Act 2016 tested in courts for Turquand’s rule, a rule designed to protect the persons dealing with the company. In reality, many who has dealings with companies do not routinely perform checks on the company’s documents. Accordingly, section 39 helps to reinforce the protection afforded by the Turquand’s rule.