Real Property (N.S.W.) - Torrens system - Compensation for loss sustained by registration of another person as proprietor - Mortgage of company's property - Seal not affixed in accordance with articles - Registration - Whether loss sustained by registration or execution of mortgage - Registrar-General entitled to assume that common seal affixed and attested with company's authority - Whether defence to claim for compensation - Real Property Act 1900 (N.S.W.), ss. 106, 127.

MASON C.J. The appellant is a company which was incorporated in 1965 for the purpose of holding certain land at Frenchs Forest near Sydney under the Real Property Act 1900 (N.S.W.). The appellant was at the relevant time the registered proprietor of that land. The first respondent is the Registrar-General. The second respondents, Robert Sturgess and Gerard Sturgess, were not represented at the hearing of the appeal.

2. The appeal concerns an instrument purporting to be a mortgage of the land executed on 24 December 1979 by the appellant, under its common seal, in favour of Barclays Credit Corporation Holdings Pty. Limited ("Barclays"), to secure the payment of principal and interest under a loan amounting to approximately $1,400,000 made by Barclays to one or more companies owned and controlled by Robert Sturgess, a director of the appellant. The appellant had no interest of any kind in those companies. The mortgage was registered on 20 May 1980. Following default, Barclays sold the land by auction under the power of sale conferred by the instrument to a third party who became the registered proprietor of the land. The appellant sued the Registrar-General for damages under s.127 of the Act by way of compensation for the loss of its estate or interest in the land on the ground that it did not execute the mortgage instrument. Section 127 permits a person who has sustained loss or damages by the registration of any other person as the proprietor of land, and who is prevented by the Act from bringing proceedings for possession or recovery of the land, to bring an action against the Registrar-General as nominal defendant for recovery of damages.

3. At all material times, the directors of the appellant were Robert Sturgess, John Lees and Robert Ellis. The shareholders were John Lees, Robert Ellis and Rogard Pty. Limited which was controlled by Robert Sturgess. None of the money lent by Barclays in consideration of the execution of the mortgage was received by the appellant. The instrument of mortgage was executed under the common seal of the appellant by Mr Sturgess, who also attested the affixing of the seal. The document also bore the signature of his son, Gerard Sturgess, who purported to sign as "company secretary".

4. Article 56 of the articles of association of the appellant provided:

"Subject to the power to delegate conferred by Article 47

the Directors shall provide for the safe custody of the Seal

and the Seal shall never be used except by the authority of

the Directors and in the presence of one Director at the

least who shall sign every instrument to which the Seal is

affixed and every such instrument shall be countersigned by

the Secretary or by a second Director or some other person

5. In two important respects Art.56 was not complied with when Robert and Gerard Sturgess signed the mortgage document and affixed the common seal. In the first place, the directors had not by resolution at a meeting authorized the affixing of the seal to the instrument of mortgage or delegated power to Robert Sturgess; nor had the directors other than Robert Sturgess approved or assented to the execution of the mortgage. The company seal had been sent by the former secretary to solicitors acting for Robert Sturgess and companies under his control. The certificate of title to the relevant land was obtained by Robert Sturgess from the company's former solicitors. Secondly, Gerard Sturgess was not in fact the company secretary. Upon the resignation of the previous secretary on 14 November 1979, Gerard Sturgess signed a letter consenting to act as secretary, and a statutory return recording his purported appointment was signed by Robert Sturgess and filed with the Corporate Affairs Commission on 22 November 1979. However, neither of the other directors knew of or approved the supposed appointment.

6. At first instance, Young J. found that the practice of the corporators and the appellant until 1980 had been to leave the administration of its affairs to Robert Sturgess and his accountants. The previous secretary had been a partner of the firm of accountants. Their only activity had been to pay the rates, to place in a book minutes of meetings, which were not actually held, and to file statutory returns. The resignation of the accountant as secretary followed a decision by his firm not to allow partners to act as officers of client companies.

7. Young J. concluded that the mortgage could not be said to have been executed by the appellant. His Honour then turned to consider whether the mortgage nonetheless took effect, in which case the appellant would fail. After examining the rule in The Royal British Bank v. Turquand (1856) 6 El. and Bl. 327 [1856] EngR 470; (119 ER 886), often called the "indoor management rule", his Honour stated that the nature of the mortgage transaction was such as to require the lender to make inquiries as to the authority of Robert and Gerard Sturgess to enter into the mortgage on behalf of the company and to affix the common seal. No evidence was put before his Honour as to what, if any, inquiries Barclays had made. This was insufficient to allow Barclays to rely on the rule in Turquand's Case so as to assert that all matters of internal management had been duly complied with and therefore take the benefit of the mortgage. Since Barclays had been put upon inquiry in this way, the improperly executed mortgage was of no effect and Young J. awarded damages in favour of the appellant.

8. The Court of Appeal allowed an appeal by the Registrar-General. Kirby P. was of the view that the indoor management rule was a special rule relating to companies rather than an instance of the general law of agency. Applying the rule to the present case, his Honour concluded that Barclays had not been put upon inquiry by the circumstances of the transaction and was entitled to rely on the rule in Turquand's Case. McHugh J.A. (with whom Samuels J.A. agreed) held that the rule was a rule of company law relating to the use of the company seal. His Honour considered that the cases in which the rule had been explained as a principle of the law of agency had blurred the distinction between contracts entered into by the company itself under its common seal and those entered into on its behalf by its agents. His Honour, after emphasizing the fact that the appellant had failed to prevent Gerard Sturgess from purporting to act as company secretary, concluded that Barclays had not been put upon inquiry by the circumstances of the transaction.

9. The Court of Appeal rejected an argument put on behalf of the appellant that, even if it had not been put upon inquiry, Barclays could not rely on the indoor management rule because the mortgage document was a forgery to which the rule had no application. Their Honours did not find it necessary to consider whether a "forgery exception" to the rule exists, because they held that, to the extent that it does exist, it does not apply to a case where a signature is genuine but unauthorized.

10. In this Court the appellant submitted that Barclays had been put upon inquiry and, secondly, that the forgery exception is part of the law and that it is applicable in the present case. The respondent Registrar-General argued that Barclays was entitled to assume that the entering into of the mortgage and the affixing of the seal were authorized by the appellant, that there were no facts shown which put Barclays on notice of any irregularity, and that any "forgery exception" to the indoor management rule was inapplicable.

11. The provisions of s.68A of the Companies Code, introduced in 1984, are directed to the issues which arise for decision in this appeal. However, as the mortgage was executed in 1979, s.68A has no application and the case must be determined by reference to the pre-existing law.

12. According to the rule in Turquand's Case, persons dealing with a company in good faith may assume that acts within its constitution and powers have been duly performed and are not bound to inquire whether acts of internal management have been regular: Morris v. Kanssen (1946) AC 459, at pp 474-475. There Lord Simonds observed (at p 475):

"It is a rule designed for the protection of those who are

entitled to assume, just because they cannot know, that the

person with whom they deal has the authority which he

claims. This is clearly shown by the fact that the rule

cannot be invoked if the condition is no longer satisfied,

that is, if he who would invoke it is put upon his inquiry.

He cannot presume in his own favour that things are rightly

done if inquiry that he ought to make would tell him that

they were wrongly done."

A person, even one who has no special relationship with the company concerned, may be put upon inquiry by the very nature of the transaction: see E.B.M. Co. Ltd. v. Dominion Bank (1937) 3 All ER 555; A.L. Underwood Ltd. v. Bank of Liverpool (1924) 1 KB 775; Rolled Steel Ltd. v. British Steel Corporation (1986) Ch 246, at pp 284-285, 295. As will appear, the application of this proposition to the facts of the present case is critical to its outcome.

13. As the content of the principle has become a matter of controversy, it is instructive to recall what Turquand's Case decided. The company was held to be liable on a bond, bearing the company's seal, whereby the company borrowed money from the bank, notwithstanding the absence of any resolution by the company in general meeting as required by the company's registered deed of settlement which empowered the directors to borrow on bond such sums as should be authorized by resolution in general meeting. The plea seems to have averred that no resolution in general meeting authorized the giving of the bond and that it was given without the consent and authority of the shareholders; see the report of the proceedings in the Court of Queen's Bench: (1855) 5 El. and Bl. 248, at pp 251-252 [1855] EngR 531; (119 ER 474, at pp 475-476). There Lord Campbell C.J., speaking for the Court, pointed out (at pp 259-260 (pp 478-479 of ER)) that, as it was conceded that the bond was executed under seal and was the deed of the company, there being no defence of non est factum, the onus rested with the defendants of showing that the bond was "unlawful and void". His Lordship went on to say (at pp 260-261 (p 479 of ER)):

"(The plea) alleges that, as between the directors and the

shareholders, the directors exceeded their authority in

executing the bond, but without adding that this was known

to the plaintiffs, or that it was to the prejudice of the

shareholders. Looking to the business to be carried on by

this Company, it might well be presumed that opening such an

account and carrying on such dealings with a banking house

as are described in the condition would be within the

authority of the directors, and would be for the benefit

of the shareholders. A mere excess of authority by the

directors, we think, of itself would not amount to a

defence. The bond being under the seal of the Company, the

gist of the defence must be illegality." (emphasis added)

Lord Campbell made the point that there was nothing to show that the directors might not have had authority to execute the bond.

14. In dismissing the appeal Jervis C.J., in the Court of Exchequer Chamber, after observing that parties dealing with companies are bound to read the statute and the deed of settlement, said (at p 332 (p 888 of ER)):

"But (persons dealing with companies) are not bound to

do more. And the party here, on reading the deed of

settlement, would find, not a prohibition from borrowing,

but a permission to do so on certain conditions. Finding

that the authority might be made complete by a resolution,

he would have a right to infer the fact of a resolution

authorizing that which on the face of the document appeared

to be legitimately done."

15. The issue raised in Turquand's Case was that the common seal had been affixed without authority. Accordingly, it would have been possible to confine the authority of the decision to that issue and some of the comments made by Lord Campbell might appear to lend support to that view of the case. However, Lord Campbell's judgment and certainly that of Jervis C.J. were capable of being understood as relating to the exercise of delegated powers generally. That is how the rule in Turquand's Case came to be applied in the later cases and, as will appear later, in that area the rule came to be seen as a particular exemplification of the principles of the law of agency.

16. Whether the application of the rule to instruments bearing the common seal of a company is also to be treated as an instance of the application of the law of agency is an unresolved question to which I shall return. But it should be noted that, when the rule was first applied to the execution of instruments bearing the common seal of the company, the sealing of a document was treated as an act of the company itself, similar in effect to a signature by an individual (The Mayor of Ludlow v. Charlton (1840) 6 M. and W. 815, at p 823 [1840] EngR 234; (151 ER 642, at pp 645-646)), rather than an act done by agents on behalf of the company. It is therefore not surprising that some judges have thought that the rule has no operation in the case of a forgery. This proposition is based principally on the decision of the House of Lords in Ruben v. Great Fingall Consolidated (1906) AC 439 and the comment of Lord Loreburn L.C. (at p 443) that the doctrine

"applies only to irregularities that otherwise might affect

a genuine transaction. It cannot apply to a forgery."

But, when properly understood, the case does not establish the proposition. The secretary of the company issued a share certificate to which he affixed the company's seal and forged the signatures of the directors in whose presence it was apparently affixed. It was held that the document was a forgery and could not bind the company in the absence of a warranty or representation given or made by an officer of the company having authority, or held out as having authority, to give such a warranty or make such a representation: see pp 443, 444. As the secretary had no actual or apparent authority to give such a warranty or make such a representation, the decision may be explained on the footing that the acts on which the plaintiff relied were outside the scope of authority of the secretary.

17. To the extent to which Lord Loreburn's comment reflected the view that an act could not be within the scope of the authority of a servant or agent if it was done fraudulently and for his own benefit and not for that of the employer or principal, that view was undermined by the later decision of the House of Lords in Lloyd v. Grace, Smith and Co. [1912] UKHL 1; (1912) AC 716. Despite this, subsequent cases contain statements that forgery is an exception to the rule in Turquand's Case: Kreditbank Cassel G.m.b.H. v. Schenkers (1927) 1 KB 826, at pp 835, 839-840, 844; South London Greyhound Racecourses Ltd. v. Wake (1931) 1 Ch 496, at p 507. However, in Uxbridge Permanent Benefit Building Society v. Pickard (1939) 2 KB 248, the Court of Appeal held that a solicitor was liable for the fraud of his managing clerk even though the fraud of the managing clerk involved forgery. It may be, as Gower's Principles of Modern Company Law, 4th ed. (1979), suggests (at pp 204-205), that forgery is not a true exception to the rule in Turquand's Case and that the cases are capable of explanation on the footing either that the forged document was not put forward as genuine by an officer acting within the scope of his actual or apparent authority or that the third party was put upon inquiry: see Pickard's Case, per MacKinnon L.J. at p 258. For the purposes of the present case it is not necessary to resolve this question because it is possible to decide the case on the basis that forgery is not an exception to the rule. However, it will become apparent from what follows later in these reasons that, if there is a forgery exception, it has a limited area of operation.

18. The application of the rule was relatively straightforward in cases in which an officer of a company exercised a power or authority which was susceptible of delegation under the articles of association. Notwithstanding that the officer was in fact exceeding his authority, the company was bound by his act, unless the person dealing with the company knew that the officer lacked the requisite authority or the circumstances were such as to put that person upon inquiry: Houghton and Co. v. Nothard, Lowe and Wills (1927) 1 KB 246. But even in these cases the question arose whether the person dealing with a company could rely on a provision in the articles if he was unaware of the provision.

19. Another source of difficulty was the case where the person acting on behalf of the company had not been appointed to the office which he appeared to hold. In such a case the critical question was whether the company had held out or represented that the person occupied the office so as to have authority to bind the company. Thus, in Albert Gardens (Manly) Pty. Ltd. v. Mercantile Credits Ltd. [1973] HCA 60; (1973) 131 CLR 60, it was held that a third party dealing with the company was entitled to assume that acts had been taken by the company to have duly appointed the persons who signed securities as directors on behalf of the company: see at p 65. So, in the present case, there was material on which Barclays would have been justified in assuming Gerard Sturgess was the secretary of the appellant. The company appears to have held him out as such, and his signature on the instrument in the capacity of secretary accompanies that of Robert Sturgess who was a director.

20. The question whether a person dealing with a company could rely on a provision in the articles authorizing delegation of a power to the officer acting on behalf of the company, when the person dealing with the company was unaware of the provision, was a matter of controversy: see Houghton's Case, at pp 266-267 (per Sargant L.J., with whom Atkin L.J. concurred); Kreditbank Cassel, at pp 837-838 (per Scrutton L.J.), p 844 (per Atkin L.J.); British Thomson-Houston Co. v. Federated European Bank Ltd. (1932) 2 KB 176. Subsequently, in Rama Corporation Ltd. v. Proved Tin and General Investments Ltd. (1952) 2 QB 147, Slade J. held that a person who has no knowledge of the company's articles of association cannot rely on them as conferring ostensible or apparent authority on the agent of the company with whom he dealt. Later, however, in Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd. (1964) 2 QB 480, the Court of Appeal qualified this proposition, holding that it applies only in the case where the contract sought to be enforced is not a contract of a kind which a person occupying the position which the agent was permitted to occupy would normally be authorized to enter into on behalf of the company.

21. So, in Freeman and Lockyer it was held that a director, Kapoor, who had assumed the powers of managing director with the company's concurrence, though he had not been appointed to that office, bound the company by entering into a contract on its behalf with the plaintiff architects. The company was a property company and the act of engaging architects fell within the ordinary scope of the authority of such a managing director so that the plaintiffs were under no necessity of inquiring whether the person with whom they were dealing was properly appointed or was authorized to enter into the contract; it was enough that the directors had allowed him to act as managing director, there being power under the articles to appoint him to that position and power to delegate to a managing director all the powers of the board of directors. By permitting Kapoor to act as the managing director, the board had effectively represented that he had authority to enter into contracts of a kind which a managing director would in the normal course be authorized to enter into on behalf of the company. The company would not have been bound had the contract not been one of that kind. In that event there would not have been a representation by the company that Kapoor had authority to enter into the contract.

22. This Court has accepted that the judgments in Freeman and Lockyer correctly state the relevant principles of law: Crabtree-Vickers Pty. Ltd. v. Australian Direct Mail Advertising and Addressing Co. Pty. Ltd. [1975] HCA 49; (1975) 133 CLR 72, at p 78. The judgments in Freeman and Lockyer, especially that of Diplock L.J., indicate that the rule in Turquand's Case in its application to the acts of a company undertaken through its agents is an exemplification of the law of principal and agent and that the ambit of the operation of the rule is to be ascertained by reference to the actual or ostensible authority of the agent who purports to act on behalf of the company. Of course, in applying the rule, account must be taken of the doctrine of ultra vires and the constitution of the company and the contents of its public documents as they may affect the actual or ostensible authority of those who purport to act on behalf of the company. Thus, if, according to the constitution of the company, the agent cannot exercise the relevant authority, his act cannot bind the company.

23. But Freeman and Lockyer says nothing about instruments executed under the common seal of a company and it does not compel us to conclude that the rule in Turquand's Case, in its application to instruments so executed, is a principle of the law of agency rather than an organic principle of the law relating to corporations. The affixing of the seal to an instrument makes the instrument that of the company itself; the affixing of the seal is in that sense a corporate act, having effect similar to a signature by an individual, as I noted earlier. Thus, it may be said that a contract executed under the common seal evidences the assent of the corporation itself and such a contract is to be distinguished from one made by a director or officer on behalf of the company, that being a contract made by an agent on behalf of the company as principal.

24. Consequently, it has been held that, if the person dealing with the company receives a document to which the common seal has been affixed in the presence of individuals designated in the articles of association, he is entitled to rely on its formal validity: In re County Life Assurance Company (1870) LR 5 Ch App 288 (where a policy issued by the company was binding even though the persons in whose presence the seal was affixed and who signed the policy were de facto directors who were not duly appointed); County of Gloucester Bank v. Rudry Merthyr Steam and House Coal Colliery Company (1895) 1 Ch 629 (where a mortgage executed under seal was binding on the company despite the absence of a quorum at the meeting of directors authorizing execution of the instrument); Duck v. Tower Galvanizing Company (1901) 2 KB 314 (where debentures issued under seal were held to be binding though signed by persons who had not been appointed directors; indeed, no directors had been appointed). In some of the cases it is said that it is enough that the third party relies on the affixing of the seal and the instrument appears to be regularly signed: see, for example, Duck's Case, at p 318.

25. However, there is no reason why a third party should be entitled to rely on the formal validity of the instrument and to assume that the seal has been regularly affixed if the very nature of the transaction is such as to put him upon inquiry. If the nature of the transaction is such as to excite a reasonable apprehension that the transaction is entered into for purposes apparently unrelated to the company's business, it will put the person dealing with the company upon inquiry. It is one thing to assume that the common seal has been regularly affixed to an instrument apparently executed for the purposes of the company's business; it is quite another thing to assume that the seal has been regularly affixed when the transaction is apparently entered into otherwise than for those purposes.

26. The decision in E.B.M. Co. Ltd. v. Dominion Bank illustrates the point. The seal of the company had been affixed to a charge of certain of its property to secure an advance by the bank to three directors of the company. On the face of the charge the seal appeared to have been affixed in accordance with the articles of association as it bore the signatures of two of the borrowers as president and secretary respectively. However, no resolution had been passed authorizing the creation of the charge. The Judicial Committee held that the transaction was unenforceable on the ground that the bank had notice of an extraordinary dealing whereby directors were using their powers to cause the company to apply its property for their benefit, there being no indication that the company stood to gain from the transaction.

27. In Wake's Case it was held that the defendant was not entitled to rely on a share certificate issued under the seal of the plaintiff company in the presence of and bearing the signature of a director D and the secretary G, as required by the articles, the seal having been affixed without the authority of the board of directors. Clauson J. (at p 509) rejected the argument that the defendant could treat the seal as having been affixed by the plaintiff company, holding that the affixing of the seal is something with which the board deals and not a director. Whatever one may think of that reason, the decision may be supported by reference to the fact that the share certificate was issued to the defendant in payment of a debt owed to him by another company of which D and G were also a director and the secretary respectively. As the transaction was one in which the plaintiff company did not stand to benefit in any way, the defendant was put upon inquiry. Alternatively, the circumstances were such that neither D nor G had actual or ostensible authority to issue a share certificate to the defendant in payment of a debt owing by another company.

28. The authorities referred to in the four preceding paragraphs are consistent with the notion that the principle applicable to instruments executed under the common seal of a company is an organic principle of company law. Affixing the common seal to an instrument is the mode of execution appropriate to corporate assent stemming from a resolution of the board of directors, the determinative act then being that of the board which is the organ of the company which administers its affairs. And the traditional principle, as the authorities demonstrate, rests on the importance which is attached to the presence of the seal on the document as signifying corporate assent.

29. Although recent English decisions appear to treat the directors as having ostensible authority to bind the company to any transaction which falls within the powers conferred by its memorandum of association (see, for example, the Rolled Steel Case, esp at p 295), it is not easy to reconcile all the cases with agency principles, particularly those cases in which the third party succeeded, notwithstanding that he seems to have been unaware of the relevant article authorizing the use of the seal. Nor does an article in the form of Art.56 lend itself to a simple application of those principles. The article provides that the seal will not be used except with the authority of the directors and in the presence of one director at least and it then makes provision for signature and countersignature by that director and the secretary (or by a second director or other person appointed) respectively. In this way the article prescribes conditions according to which the seal is to be used. Although the giving of authority by the directors for the use of the seal is one such condition, directors do not, and are not required to, authorize particular persons to use the seal and to sign and countersign the instrument to which the seal is affixed. The article itself designates the persons who may perform the functions which are dealt with in the provision. As McHugh J.A. pointed out in his judgment in the Court of Appeal, it is the presence of the seal on the document that gives rise to the presumption that the seal has been affixed with the authority of the directors.

30. On the other hand, in the Rolled Steel Case the English Court of Appeal has accepted the view that because a company holds out its directors as having ostensible authority to bind the company to any transaction which falls within the powers conferred by the memorandum of association, a person dealing in good faith with the company carrying on an intra vires business is entitled to assume that the directors are properly exercising such powers for the purposes of the company as set out in the memorandum, unless he is put on notice to the contrary: see at pp 292-296, 304-307, 309. Browne-Wilkinson L.J. expressed his understanding of the relevant principles in the form of these propositions (at pp 306-307):

"If a company enters into a transaction which is intra vires

(as being within its capacity) but in excess or abuse of its

powers, such transaction will be set aside at the instance

of the shareholders. ... A third party who has notice -

actual or constructive - that a transaction, although intra

vires the company, was entered into in excess or abuse of

the powers of the company cannot enforce such transaction

against the company and will be accountable as constructive

trustee for any money or property of the company received by

the third party. ... The fact that a power is expressly

or impliedly limited so as to be exercisable only 'for the

purposes of the company's business' (or other words to that

effect) does not put a third party on inquiry as to whether

the power is being so exercised, i.e., such provision does

not give him constructive notice of excess or abuse of such

power."

31. The Court of Appeal in that case drew a distinction between a transaction which is beyond the capacity of the company ("ultra vires" in the primary sense) and a transaction which is not beyond the capacity of the company but is beyond the authority of the directors or a majority of the shareholders; see also Re Halt Garage (1964) Ltd. (1982) 3 All ER 1016, per Oliver J. at pp 1029-1030. The propositions taken from the judgment of Browne-Wilkinson L.J. which I have quoted relate to transactions of the second class. The consequence of applying the propositions to a lender to a company which has power to borrow for the purposes of the company is that the lender is not put upon inquiry by the terms of the power as stated in the memorandum of association. The lender is protected unless he has knowledge that the borrowing is not for an authorized purpose (see In re David Payne and Co. Limited (1904) 2 Ch 608, at pp 613, 617-618, 619-620) or if the very nature of the transaction is such as to put the lender upon inquiry. Although it is not necessary to resolve the question for the purposes of this case, the reason why the lender should necessarily be relieved of the responsibility of turning his mind to the powers of the company is not altogether apparent to me.

32. The judgment of Harman L.J. in In re Introductions Ltd. (1970) Ch 199, where the validity of debentures granted by a company as security for a loan was in issue, appears at first sight to be even more favourable to the lender. Harman L.J. observed (at p 210):

"I would agree that, if the bank did not know what the

purpose of the borrowing was, it need not inquire, but it

did know ..." (emphasis added)

"This borrowing was not for a legitimate purpose of the

company: the bank knew it, and, therefore, cannot rely on

its debentures."

However, his Lordship's comment should be read as relating to the facts of the case rather than as a general proposition denying that a lender can be put upon inquiry in relation to an intra vires transaction.

33. Regardless of the answer to the question what significance should be accorded to the company's powers as expressed in its memorandum (where powers are so expressed), the result in England is that, although the rule has been treated as a principle of agency, even in its application to the exercise of powers by directors within the capacity of the company, the traditional notion, expressed by Lord Simonds in Morris v. Kanssen (at p 475), that the third party may be put upon inquiry by the nature of the transaction or the circumstances still stands. Consequently, at least so far as the present case is concerned, it makes little difference whether the rule is treated as a special rule or as a principle of the law of agency. Nonetheless, the role of the seal as the signature of the company suggests that to speak simply in terms of agency in cases involving its use may be insufficient in some situations. Further, use of agency principles overlooks the significance of the company seal and the reliance which may ordinarily be placed upon it.

34. What is important is that the principle and the criterion which the rule in Turquand's Case presents for application give sufficient protection to innocent lenders and other persons dealing with companies, thereby promoting business convenience and leading to just outcomes. The precise formulation and application of that rule call for a fine balance between competing interests. On the one hand, the rule has been developed to protect and promote business convenience which would be at hazard if persons dealing with companies were under the necessity of investigating their internal proceedings in order to satisfy themselves about the actual authority of officers and the validity of instruments. On the other hand, an overextensive application of the rule may facilitate the commission of fraud and unjustly favour those who deal with companies at the expense of innocent creditors and shareholders who are the victims of unscrupulous persons acting or purporting to act on behalf of companies. Agency principles aside, to hold that a person dealing with a company is put upon inquiry when that company enters into a transaction which appears to be unrelated to the purposes of its business and from which it appears to gain no benefit is, in my opinion, to strike a fair balance between the competing interests. Indeed, there is much to be said for the view that the adoption of such a principle will compel lending institutions to act prudently and by so doing enhance the integrity of commercial transactions and commercial morality.

35. It is not possible to give specific guidance as to the circumstances in which the nature of a transaction will be such as to put a person dealing with a company upon inquiry. So much depends upon the circumstances of the particular case, notably the powers of the company (if relevant), the nature of its business, the apparent relationship of the transaction to that business and the actual or apparent authority of those acting or purporting to act on behalf of the company. Much will also depend upon representations about the transaction made by such persons, for the party dealing with the company may often find protection in the principles of agency or the doctrine of estoppel. In this respect, I should indicate my general agreement with the comments made by Brennan J. in his judgment, which I have had the advantage of reading since preparing these reasons, concerning the position of a creditor who takes a company's guarantee for another's debt.

36. The course of events leading to the giving of the mortgage began in September 1979 with a request by Robert Sturgess to Barclays for financial accommodation for one or more of the Sturgess companies. The appellant had no association of any kind with these companies and there was no apparent connection between them and the appellant or between their respective businesses. The only links between them were that Robert Sturgess was a director of each, that Gerard Sturgess was secretary of each except the appellant and was acting as secretary of the appellant, and that the companies had their registered offices at the same address. In response to Barclays' demand for additional security over and above that initially offered, Robert Sturgess offered Barclays a mortgage over the property at Frenchs Forest.

37. The officers of Barclays presumed that all was in order. They may have assumed incorrectly that the appellant and the other companies were associated companies linked by shareholding by reason of their having a common registered office, director and secretary. They made no searches or inquiries and there was no evidence as to searches or inquiries made on their behalf by their solicitors. Had inquiries been made the records of the Corporate Affairs Commission would have disclosed that Robert Sturgess was a director, that Gerard Sturgess was shown as secretary of the appellant and that such a transaction was authorized by the articles. And, as I remarked earlier, there was nothing on the face of the mortgage to indicate that it was unauthorized, except that it was given to secure an advance to a third party without any indication that the giving of the mortgage or the procuring of the advance was for the purposes of the appellant's business or related in any way to that business. That, in my opinion, is the decisive consideration; it requires the conclusion that Barclays was put upon inquiry.

38. If this case were to be disposed of in terms of agency principles, the result would be the same. There was no representation by the directors that the seal was affixed with their authority or that they had approved the transaction which, on its face, appeared not to serve any interest of the appellant. There was no evidence that anyone having authority so to do from the appellant represented that the mortgage was valid. At best there was a representation by Robert or Gerard Sturgess, or both of them, but they were not authorized to make such a representation and, in any event, they were interested parties evidently deriving a benefit, even if only indirectly from the transaction. Moreover, there was no evidence which could justify a finding that Barclays relied on a representation that the seal was affixed with the authority of the directors or that the transaction was approved by them.

39. The result would have been different if Barclays had had a legitimate basis for thinking that the appellant had an interest in the borrowing companies and that they were associated with the appellant, one having an interest in the other: see In re Hapytoz Pty. Ltd. (in liquidation) [1937] VicLawRp 13; (1937) VLR 40. The participation of the Sturgesses in the affairs of the companies and the common registered office was not an adequate foundation for that belief; nor did it amount to a representation by the appellant that it had an interest in any of the borrowing companies.

40. The first respondent submitted that third party lending is now such a common occurrence in the world of commerce that Barclays was justified in acting upon the footing that the instrument of mortgage had been regularly executed. I do not consider that such a wide-ranging proposition should be accepted or that the frequency of third party lending, if it be a fact, should be permitted to outweigh the particular factors which lead to the conclusion that Barclays was put upon inquiry.

41. The first respondent also submitted that s.51A(1) of the Conveyancing Act 1919 (N.S.W.) and s.106 of the Real Property Act were an answer to the appellant's case. Section 51A(1) provides:

"In favour of a purchaser in good faith -

(a) a deed shall be deemed to have been duly executed by a

corporation aggregate if its seal is affixed thereto

in the presence of and attested by its clerk,

secretary, or other permanent officer or his deputy,

and a member of the board of directors, council, or

other governing body of the corporation; and

(b) where a seal purporting to be the seal of a corporation

has been affixed to a deed attested by persons

purporting to be persons holding such offices as

aforesaid, the deed shall be deemed to have been

executed in accordance with the requirements of this

section, and to have taken effect accordingly."

The first respondent conceded that s.51A(1) does not apply directly to the present case because the instrument of mortgage was not a deed prior to its registration under the Real Property Act. However, he submits that the sub-section throws light on the rule in Turquand's Case. The short answer is that the statutory provision cannot be used to interpret the principle of general law.

42. Section 106 stands in a different position. Sub-section (1) enables a corporation for the purpose of dealing with land under the Real Property Act to affix the common seal of the corporation. Sub-section (2) provides that:

"Where -

(a) a seal purporting to be the seal of a corporation ...

has been affixed to a ... dealing, caveat or other

document; and

(b) the affixing of the seal purports to have been attested

by a person or persons holding office in the

corporation or by a person or persons authorised to

attest the affixing of the seal,

the Registrar-General may assume -

(c) that the seal and attestation are genuine and were

lawfully affixed ...; and

(d) that the person or persons purporting to have attested

the affixing of the seal had sufficient authority ..."

43. Here the requirements of (a) and (b) were satisfied. The signatures of Robert and Gerard Sturgess each appear below a statement that the seal was affixed in the presence of the signatory. Accordingly, they were persons who attested the affixing of the seal within the requirements of par.(b). The Registrar-General was therefore entitled to make the assumptions set out in pars (c) and (d) and to register the instrument.

44. The first respondent contended that this conclusion necessarily disentitles the appellant to relief by way of damages under s.127 of the Real Property Act. The argument is that, once the Registrar-General became entitled to make the assumptions mentioned in pars (c) and (d) of s.106(2), he was entitled to make those assumptions in defending an action under s.127(1). The point was not argued in the courts below but it is and was common ground that, by reason of the registration of the instrument of mortgage and subsequent transfer, the appellant sustained a loss within the meaning of the sub-section. The registration of the instruments conferred an indefeasible title on Barclays and the third party purchaser. In the circumstances of this case that registration deprived the appellant of its estate or interest in the land, thereby causing it to sustain loss or damages. In one sense the appellant lost its estate or interest in the land because the borrower failed to repay the loan, but in this case it is not disputed that, subject to the arguments already dealt with, the registration of the instruments was the cause of the appellant's loss for the purposes of s.127. A second answer to the first respondent's argument based on s.106 is that this provision is unrelated to ss.126 and 127. The latter provisions concern the Registrar-General in his capacity, not as statutory officer, but merely as nominal defendant. The apparent object of s.106 is to facilitate the prompt registration of dealings by avoiding the necessity for protracted inquiries by the Registrar-General. The object of the section is not to exclude claims for compensation under ss.126 and 127 in cases to which s.106 applies. Indeed, one consequence of providing for prompt registration by means of s.106 is that there is a need to allow for claims for compensation when loss is sustained by a registered proprietor by reason of the registration of an invalid instrument.

45. For the foregoing reasons I would allow the appeal with costs, set aside the orders made by the Court of Appeal and order that in lieu of those orders the appeal to that Court be dismissed with costs.

BRENNAN J. The issue on which the parties have litigated the claim by the appellant ("Northside") against the respondent, the Registrar-General, under s.127 of the Real Property Act 1900 (N.S.W.) is whether, as between Northside and Barclays Credit Corporation Holdings Pty. Limited ("Barclays"), Northside was bound by an instrument of mortgage in favour of Barclays bearing the imprint of Northside's common seal attested by the signature of Robert Sturgess, a director of Northside, and countersigned by his son, Gerard Sturgess, who was described therein as "company secretary". Gerard Sturgess had not been appointed to that office. Barclays took and, after a time, registered the instrument of mortgage as part of the security for a loan, or as security for a purported guarantee of a loan, of approximately $1,400,000 made by Barclays to companies which Robert Sturgess owned and controlled and in which Northside had no interest. The business of Northside was simply the holding of the land pending its resale at a suitable time. The circumstances in which Robert Sturgess was able to obtain possession of the seal and of the relevant certificate of title are set out by the Chief Justice and I need not repeat them. Northside acquired no benefit from the loan or from the giving of the mortgage. Robert Sturgess brought the instrument into existence and used it in fraud of Northside.

2. Northside is a company limited by shares, incorporated under the Companies Act 1961 (N.S.W.). Article 56 of its articles of association reads as follows:

"Subject to the power to delegate conferred by Article 47

the Directors shall provide for the safe custody of the

Seal and the Seal shall never be used except by the

authority of the Directors and in the presence of one

Director at the least who shall sign every instrument to

which the Seal is affixed and every such instrument shall

be countersigned by the Secretary or by a second Director

or some other person appointed by the Directors for the

purpose."

The directors passed no resolution authorizing the affixing of the seal on the instrument of mortgage. Nor was the signature of Gerard Sturgess a countersignature "by the Secretary or by a second Director or some other person appointed by the Directors for the purpose." The purpose of requiring a countersignature is so that the signature of the director may be authenticated: Equity Nominees Ltd. v. Tucker [1967] HCA 22; (1967) 116 CLR 518, at p 523.

3. In Equity Nominees, where a creditor sought to recover against a subsidiary of a principal debtor under a purported deed of guarantee given by the subsidiary, disconformity between the mode of execution and the mode prescribed by the governing article of association was held fatal to the validity of the purported deed. There, while the article required the sealing to be attested by two directors countersigned by the secretary or a person appointed for the purpose, the purported deed bore only two signatures. Windeyer J. said, at pp 525-526:

"The question then is: Was the document on the face of it

duly executed so as to be the company's deed? In my

opinion it was not. Doubtless it is true that a company

makes a deed when it executes under its common seal an

instrument described as a deed. But when by the company's

articles formalities and a procedure are prescribed for the

authorization of the use of the seal and its authentication

these must be complied with. Where they are apparently

complied with the company will be bound as against a person

dealing with the company in good faith. That rule has

however no application here, because, apart from other

considerations, the requirements of art. 31 were not

complied with either apparently or in fact. As stated

in Norton on Deeds, 2nd ed., p 24, 'Directors in whose

presence the seal of a corporation is affixed, where the

regulations of the corporation require the seal to be

affixed in their presence, are not witnesses; they attest

the sealing as part of the operation of sealing and not as

witnesses'."

Compliance with the formalities prescribed by the articles of association was not regarded as a mere technicality, as his Honour observed (at pp 526-527):

" As the seal was never duly affixed, the deed was not the

company's deed: cf. In re Efron's Tie and Knitting Mills

Pty. Ltd. [1932] VicLawRp 3; ((1932) VLR 8). I do not think we must look on

this as the result of a mere legal technicality. ... it is

surely more than a mere technicality to expect that a

company's guarantee should be an engagement into which it

enters by the decision of its own directors, at a meeting

duly convened, and that effect be given to this decision in

the manner required by law. All that can concern a court

in these matters is of course that the law be observed."

A corporation's seal on an instrument has never been held to bind the corporation (except by estoppel) if it has been affixed without authority: Anon, Case 728, 12 Mod.423 (88 ER1425); Mayor, andc., of Merchants of the Staple of England v. Governor and Company of Bank of England (1887) 21 QBD 160.

4. In this case, the instrument of mortgage bears the imprint of Northside's seal, it bears the signature of a Northside director attesting the sealing and the countersignature of a person who is described as, but was not, Northside's secretary. Although no disconformity appears on the face of the instrument between the manner of its execution and the manner prescribed by Northside's articles, its execution without the authority of the board of directors and its countersignature by Gerard Sturgess, who was not the secretary, establish that it was not Northside's instrument of mortgage. If Northside was bound nevertheless by the instrument of mortgage, it must have been bound by estoppel. In Bank of Ireland v. Evans' Trustees [1855] EngR 714; (1855) 5 HLC 389 (10 ER 950) the fraudulent secretary of a corporation, by the negligence of the trustees of the corporation, was able to affix the corporate seal on certain powers of attorney on which the bank acted in registering transfers of stock. It was held that mere negligence in the keeping of the seal was not sufficient to absolve the bank. Lord Cranworth L.C. said (at p 413 (p 960)) "that there must be either something that amounts to an estoppel, or something that amounts to a ratification, in order to make the negligence a good answer." It must be so, for there are no other doctrines of the law which can give to an instrument sealed without authority the effect which it would have if the sealing were authorized. To found an estoppel, it was said that the negligence had to be "proximately connected" with the transfer itself: see p 410 (p 959) and Merchants of the Staple of England, at pp 172,174,176.

5. Northside's claim in this case is for the loss occasioned by registration of the instrument of mortgage and the estoppel on which the Registrar-General relies is an estoppel against denying that that instrument was binding on Northside or, to put it another way, an estoppel against denying that the instrument of mortgage was not executed by Northside. As the action is founded on the alleged binding effect of the instrument, it is the execution of the instrument to which attention must be directed. The respondent submits that Barclays was entitled to rely on the apparent regularity of the execution of the instrument of mortgage in accordance with the rule in The Royal British Bank v. Turquand (1856) 6 El. and Bl.327 [1856] EngR 470; (119 ER 886). That rule, known as the "indoor management" rule, was said by Lord Simonds in Morris v. Kanssen (1946) AC 459, at p 474, to be correctly stated in Halsbury's Laws of England as follows:

"But persons contracting with a company and dealing in good

faith may assume that acts within its constitution and

powers have been properly and duly performed and are not

bound to inquire whether acts of internal management have

been regular."

(See now 4th ed., vol.7(1), (1988), par.980.) Under the indoor management rule, so the argument runs, Barclays was entitled to assume that the directors of Northside had authorized the affixing of the seal to the instrument and had appointed Gerard Sturgess as the secretary. The scope of the indoor management rule is illuminated by a consideration of the nature of an incorporated company and the manner in which, by its officers and agents, it deals with others.

6. A company, being a corporation, is a legal fiction. Its existence, capacities and activities are only such as the law attributes to it. The acts and omissions attributed to a company are perforce the acts and omissions of natural persons. A company is bound by an act done when the person who does it purports thereby to bind the company and that person is authorized to do so or the doing of the act is subsequently ratified. (There is no question of ratification in this case.) Authority for the purpose is derived either directly from the constitution of the company or from some antecedent act (typically, a resolution of the governing body) which is itself binding on the company. As between a company and a party who deals with it, a company is bound by an act purporting to bind it not only when the person who does the act has the company's authority to bind it by that act but also when that person is held out by the company as having that authority and the party dealing with the company relies on that person's ostensible authority. Conversely, the company is not bound when the person who does the act has neither actual nor ostensible authority to bind the company by doing the act which the other party asserts to be binding on the company. The foundation of ostensible authority is estoppel, as Diplock L.J. pointed out in Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd. (1964) 2 QB 480, at p 503:

" An 'apparent' or 'ostensible' authority ... is a legal

relationship between the principal and the contractor

created by a representation, made by the principal to the

contractor, intended to be and in fact acted upon by the

contractor, that the agent has authority to enter on behalf

of the principal into a contract of a kind within the scope

of the 'apparent' authority, so as to render the principal

liable to perform any obligations imposed upon him by such

contract. To the relationship so created the agent is a

stranger. He need not be (although he generally is) aware

of the existence of the representation but he must not

purport to make the agreement as principal himself. The

representation, when acted upon by the contractor by

entering into a contract with the agent, operates as an

estoppel, preventing the principal from asserting that he

is not bound by the contract. It is irrelevant whether the

agent had actual authority to enter into the contract."

Although Diplock L.J. confined his observations to the ostensible authority of an agent to bind his principal to a contract, the principles he stated apply mutatis mutandis to authority to bind a company by other acts done purportedly on behalf of a company: see Armagas Ltd. v. Mundogas S.A. [1985] UKHL 11; (1986) AC 717, at p 732.

7. The principles governing ostensible authority find their usual application in cases of principal and agent. It may be thought that the ostensible authority of an agent is irrelevant to the execution of an instrument under seal purporting to be a company's instrument, for the sealing of an instrument can be seen as the act of the company itself rather than as the act of the company's agent. It is immaterial whether the acts of natural persons in executing an instrument which binds the company are invested with the character of acts of the company itself or with the character of acts done by an agent of the company. In determining whether an act which purports to bind a company does bind the company, it is not the character which would be attributed to an authorized act which matters. The material inquiry calls for identification of the particular act, the person who did it and the authority - actual or ostensible - of that person to bind the company by the doing of that act. When an action is brought on a contract contained in an instrument or is founded on an instrument which purports to bind a company but the company denies that the instrument is its instrument, the issue is whether the instrument was duly executed, whether in the affixing of the seal, the attesting of the sealing, the countersignature or in some other manner of purported authentication. Although, as we shall see, the transaction in which the instrument is used is material to the application of the indoor management rule in relation to the execution of the instrument, it is the acts done in executing the instrument which are the subject of inquiry in such a claim.

8. The application of the principles of ostensible authority to a company requires two further characteristics of a corporation to be borne in mind, as Diplock L.J. said in Freeman and Lockyer, at pp 504-505:

"The first is that the capacity of a corporation is limited

by its constitution, that is, in the case of a company

incorporated under the Companies Act, by its memorandum and

articles of association; the second is that a corporation

cannot do any act, and that includes making a

representation, except through its agent.

Under the doctrine of ultra vires the limitation of the

capacity of a corporation by its constitution to do

any acts is absolute. This affects the rules as to the

'apparent' authority of an agent of a corporation in two

ways. First, no representation can operate to estop the

corporation from denying the authority of the agent to do

on behalf of the corporation an act which the corporation

is not permitted by its constitution to do itself.

Secondly, since the conferring of actual authority upon an

agent is itself an act of the corporation, the capacity to

do which is regulated by its constitution, the corporation

cannot be estopped from denying that it has conferred

upon a particular agent authority to do acts which by

its constitution, it is incapable of delegating to that

particular agent.

...

The second characteristic of a corporation, namely, that

unlike a natural person it can only make a representation

through an agent, has the consequence that in order to

create an estoppel between the corporation and the

contractor, the representation as to the authority of the

agent which creates his 'apparent' authority must be made

by some person or persons who have 'actual' authority from

the corporation to make the representation. Such 'actual'

authority may be conferred by the constitution of the

corporation itself, as, for example, in the case of a

company, upon the board of directors, or it may be

conferred by those who under its constitution have the

powers of management upon some other person to whom the

constitution permits them to delegate authority to make

representations of this kind. It follows that where the

agent upon whose 'apparent' authority the contractor relies

has no 'actual' authority from the corporation to enter

into a particular kind of contract with the contractor on

behalf of the corporation, the contractor cannot rely upon

the agent's own representation as to his actual authority.

He can rely only upon a representation by a person or

persons who have actual authority to manage or conduct that

part of the business of the corporation to which the

contract relates."

His Lordship's statements of principle were approved by this Court in Crabtree-Vickers Pty. Ltd. v. Australian Direct Mail Advertising and Addressing Co. Pty. Ltd. [1975] HCA 49; (1975) 133 CLR 72, at p 78. I have cited these passages at length because his Lordship's characteristically lucid exposition of the general principles of estoppel provides the framework within which the specifically "indoor management" cases are to be placed. There being no other framework of legal principle in which they can be placed, the indoor management cases must be analysed within that framework.

9. At the outset, it is necessary to state the relationship of the indoor management rule with a company's constitution. As a company's constitution defines the authority which the company can confer on its officers and agents, the constitution limits the authority which can be conferred on persons to execute binding instruments (or to engage in transactions) on the company's behalf. If the constitution of the company shows that the person or persons executing an instrument could not have been given authority to bind the company by their respective acts of execution, the company is not bound; if it shows that that person or those persons might have been given such authority, the question is whether that person or those persons had such authority or were held out by the company to have had it. The question whether the particular authority could have been given under the constitution is a question of law; the question whether the authority was given is a question of fact, the answer to which is affected by a presumption of regularity.

10. As the constitution of a company determines the authority which can be conferred on an officer or agent, the "indoor management" rule can operate only within the limits prescribed by the company's constitution. In Mahony v. East Holyford Mining Co. (1875) LR 7 H.L. 869, at pp 893-894, Lord Hatherley held it to be settled -

"that those who deal with joint stock companies are bound to

take notice of that which I may call the external position

of the company. Every joint stock company has its

memorandum and articles of association ... Those articles

of association ... are open to all who are minded to have

any dealings whatsoever with the company, and those who so

deal with them must be affected with notice of all that is

contained in those two documents.

After that, the company entering upon its business and

dealing with persons external to it, is supposed on its

part to have all those powers and authorities which, by its

articles of association and by its deed, it appears to

possess; and all that the directors do with reference to

what I may call the indoor management of their own concern,

is a thing known to them and known to them only; subject to

this observation, that no person dealing with them has a

right to suppose that anything has been or can be done that

is not permitted by the articles of association or by the deed."

Again, Lord Halsbury explained in County of Gloucester Bank v. Rudry Merthyr Steam and House Coal Colliery Company (1895) 1 Ch 629, at p 633:

"Persons dealing with joint stock companies are bound

to look at what one may call the outside position of the

company - that is to say, they must see that the acts which

the company is purporting to do are acts within the general

authority of the company, and if those public documents,

which everyone has a right to refer to, disclose an

infirmity in their action, they take the consequences of

dealing with a joint stock company which has apparently

exceeded its authority. But the case here is exactly the

other way. All the public documents with which an outside

person would be acquainted in dealing with the company

would only shew this, that by some regulations of their

own, what Lord Hatherley described as their indoor

management, they were capable if they had thought right of

making any quorum they pleased; and an outside person

knowing that, and not knowing the internal regulation, when

he found a document sealed with the common seal of the

company and attested and signed by two of the directors and

the secretary, was entitled to assume that that was the

mode in which the company was authorized to execute an

instrument of that description."

And, in Uxbridge Permanent Benefit Building Society v. Pickard (1939) 2 KB 248, Sir Wilfrid Greene M.R. said (at p 257):

"In the case of limited companies special rules came into

operation. In the case of a limited company the actual

authority of an agent is of necessity limited by the

constituent documents under which the company has its

existence and from which it derives its power, which a

person dealing with the company is assumed to know; but the

internal management and everyday internal administration of

the company is a thing which an outsider cannot be expected

to know by the light of nature or by inspecting some file

as he can with public documents like memoranda and articles

of association. In order to ascertain things of that kind

he would have to make detailed inquiries inside the

company's office. It is quite obvious that the business of

limited companies could never be carried on if everybody

dealing with a company was at his peril bound to ascertain

whether the internal administration of the company had been

regularly conducted."

11. There are practical reasons why a party who relies on an instrument purporting to be the instrument of a company should be entitled to assume in the ordinary course of commerce that its execution has been authorized by the company, as Estey J. pointed out in Canadian Laboratory Supplies Ltd. v. Engelhard Industries of Canada Ltd. (1979) 97 DLR (3d) 1, at p 24:

"Modern commerce at practically all levels and sectors

operates through the corporate vehicle. That vehicle

itself, by conglomerate grouping and divisionalization, has

become increasingly complex. Persons, including corporate

persons, dealing with a corporation must for practical

reasons be able to deal in the ordinary course of trade

with the personnel of that corporation secure in the

knowledge that the law will match these practicalities with

binding consequences. The law has long so provided."

12. The indoor management rule is really a presumption of regularity. To use the Latin maxim, omnia praesumuntur rite esse acta: Morris v. Kanssen, at p 475. The presumption is no more than a presumption of fact. Whence does it arise? It arises from the likelihood that a company has given to its officers and agents the authority needed to carry on its business and to act for its benefit within the limits of the authority which officers and agents in their respective positions would ordinarily possess. The presumption might reasonably be made when the officers or agents of a company engage in a transaction for the purpose of a company's business or otherwise for the benefit of the company and the transaction is one that officers or agents in their respective positions would ordinarily be expected to have the company's authority to undertake. In that situation, a party dealing with the company in good faith is entitled to presume that the officers and agents had that authority: cf. Uxbridge Permanent Benefit Building Society v. Pickard, at p 258. Being a presumption of fact, the indoor management rule is displaced when the circumstances put on inquiry the party seeking to rely on the rule.

13. If the rule can found an estoppel against a company, in what does the necessary representation made by the company consist? Clearly enough, the representation required to support an estoppel depends upon the subject matter of the estoppel. An estoppel with respect to the appointment of de facto directors may be raised by subscribers to the memorandum and articles standing by while the de facto directors assume the control of the company's affairs; an estoppel as to the conferring of authority on an officer of the company may be raised by the directors permitting the officer to undertake a class of transactions on the company's behalf. Thus, in Smith v. The Hull Glass Company [1852] EngR 142; (1852) 11 CB 897 (138 ER 729) where a company was held liable for the price of goods supplied for the purpose of its business on the order of a manager to whom there was no express delegation of authority by the board, Maule J. said (at p 928 (pp 741-742)):

"the act of parliament and the deed of settlement enable

the company to carry on their business through the agency

of persons to be appointed by them. Whether or not

the persons so appointed were regularly appointed, the

plaintiffs, or any other persons dealing with them, could

have no means of knowing: they have no power to inspect the

minute-book. Here are persons found transacting business

and receiving goods upon the company's premises, and using

them for the purposes of the company; and all this with the

knowledge of the company. ... This is the simple case of

an individual, or a body corporate, carrying on business

in the ordinary way, by the agency of persons apparently

authorised by him or them, and acting with his or their

knowledge. The case differs in no respect from the

ordinary one of dealings at a shop or counting-house: the

customer is not called upon to prove the character or the

authority of the shopman or clerk with whom he deals; if he

is acting without or contrary to the authority conferred

upon him by his employers, it is their own fault. It seems

to me, therefore, that these defendants are bound by the

acts of the persons who have taken upon themselves, with

their knowledge, to act for them in ordering the goods

in question, and receiving them, and using them in their

business."

To found an estoppel as to the authority of an officer or agent who is engaged in a transaction for the purposes of the company's business or otherwise for the company's benefit and who is purporting to exercise an authority which an officer or agent in that position would ordinarily be expected to have, the mere carrying on of the company's business with officers and agents performing particular functions on its behalf and in its interest is a sufficient representation by the company. Although such representations by the company seem a slender foundation on which to build an estoppel, the indoor management rule treats them as sufficient unless the party relying on the rule is put on notice to inquire into the authority of the officers or agents to do what they did in the transaction. The slenderness of the foundation enhances the importance of the qualification. In transactions other than those engaged in for the purposes of a company's business or otherwise for the benefit of the company, and in transactions where the officer or agent has purported to exercise an authority over and beyond the authority which an officer or agent in that position would ordinarily be expected to possess, a party seeking to bind the company by estoppel must rely on particular representations of authority made by the company - that is, by officers or agents of the company having actual or ostensible authority to make those representations.

14. When the indoor management rule applies, it covers each of the links between the constitution of the company and the particular act (or omission) done (or omitted) by a purported officer or agent of the company in the transaction. It covers the due making of appointments of the original directors, of subsequent directors, of other officers and of agents; it covers the conferring of authority on officers and agents; and it covers the satisfaction of conditions governing their exercise of authority in the instant case. As the presumption of regularity covers each of these links, so may the circumstances of a particular case put a party dealing with the company on inquiry as to any one of them. The cases in which the indoor management rule has been applied can be placed within one or other of the three broad categories - appointments, conferring of authority and satisfaction of conditions - though the categories are not, of course, mutually exclusive.

15. The appointment category includes Mahony v. East Holyford Mining Co., at pp 888,892,897-898,901; In re County Life Assurance Company (1870) LR 5 Ch App 288; Duck v. Tower Galvanizing Company (1901) 2 KB 314; and Albert Gardens (Manly) Pty. Ltd. v. Mercantile Credits Ltd. [1973] HCA 60; (1973) 131 CLR 60, at p 65. In In re County Life Assurance Company, Giffard L.J. said (at p 293):

"The company is bound by what takes place in the usual

course of business with a third party where that third

party deals bon fide with persons who may be termed

de facto directors, and who might, so far as he could tell,

have been directors de jure."

16. An example of the rule's application to the conferring of authority on an officer can be found in British Thomson-Houston Co. v. Federated European Bank, Ld. (1932) 2 KB 176 where a company, whose business extended to the giving of guarantees, was sued on a guarantee signed by only one director. The articles conferred power on the board to delegate its powers to one director and the indoor management rule was held to cover the assumed authority of the one director to sign the guarantee. Scrutton L.J. said (at p 180):

"... Royal British Bank v. Turquand and Mahony v. East

Holyford Mining Co. decide that if the articles of

association give a power, persons dealing with the company,

though they are deemed to have notice of the extent of the

power, are not bound to inquire into what is called the

'indoor management' of the company to see whether the power

has been properly and regularly exercised with all the

prescribed formalities, and if they find an officer of the

company openly exercising an authority which the directors

have power to confer upon him, they are relieved from the

duty of further inquiry and are entitled to assume that the

power has been regularly and duly conferred."

17. The rule is most frequently invoked in connection with the execution of instruments which give a security when the point in issue is the satisfaction of a condition governing the authority to execute the instrument in the instant case. Where the rule applies, it covers the passing of any necessary resolution by the board authorizing the company's officers to affix the seal and attest the sealing. Thus in The Royal British Bank v. Turquand, the plaintiff sued on a deed which was alleged and admitted to be sealed with the company's common seal. The question was whether the seal had been affixed without authority, the want of authority consisting in a supposed absence of a resolution by the company in general meeting authorizing the execution of the deed. The deed was executed as security for the company's bankers who extended credit to the company in the carrying on of its business. The constitution of the company authorized the execution of such a deed for the purpose of borrowing. Jervis C.J., in the Exchequer Chamber, held that even if no resolution of the company in general meeting had been passed, the Bank "would have a right to infer the fact of a resolution authorizing that which on the face of the document appeared to be legitimately done": p 332 (p 888). Other cases in this category include County of Gloucester Bank v. Rudry Merthyr Steam and House Coal Colliery Company and Re Scottish Loan and Finance Co.Ltd. (1944) 44 SR(NSW) 461. In South London Greyhound Racecourses, Ld. v. Wake (1931) 1 Ch 496, Clauson J. held that the rule did not apply to a guarantee sealed without authority of the company's board, saying (at p 509) "that the affixing of the seal is a matter for which the authority of the board of directors and not of a single director is required." Although his Lordship correctly stated the condition governing the actual authority of directors to affix the seal, a person dealing with the company in good faith might have assumed that the board had given its authority to the fixing of the seal. However, there was a distinction between that case and Turquand's Case. In Turquand's Case, a security was given for the company's debt; in Wake's Case, a share certificate was issued and delivered to a creditor as security for the debt of a third party. In Turquand's Case, the security was given for the purposes of the company's business; in Wake's Case, the share certificate was not issued for the purposes of the company's business but for the benefit of an unrelated debtor company. Having regard to this ground of distinction, the decision in Wake's Case is supportable but, for reasons presently to be mentioned, I am respectfully unable to agree with his Lordship that, because a board resolution was lacking, the share certificate in Wake's Case was a forgery falling within the principles of Ruben v. Great Fingall Consolidated (1906) AC 439.

18. A party dealing with a company cannot assume that its officers or agents have a particular authority if the circumstances are such as to put that party on inquiry as to whether the authority exists and no inquiry is made or the company fails to satisfy the inquiry. Lord Simonds said in Morris v. Kanssen, at p 475:

"But the maxim has its proper limits. ... It is a rule

designed for the protection of those who are entitled to

assume, just because they cannot know, that the person with

whom they deal has the authority which he claims. This is

clearly shown by the fact that the rule cannot be invoked

if the condition is no longer satisfied, that is, if he who

would invoke it is put upon his inquiry. He cannot presume

in his own favour that things are rightly done if inquiry

that he ought to make would tell him that they were wrongly

done."

This passage was quoted by Slade L.J. in Rolled Steel Ltd. v. British Steel Corpn. (1986) Ch 246, at p 284, where his Lordship said that the rule in Turquand's Case is not "an absolute and unqualified rule of law, applicable in all circumstances." He added:

"... even if persons contracting with a company do not have

actual knowledge that an irregularity has occurred,

they will be precluded from relying on the rule if the

circumstances were such as to put them on inquiry which

they failed duly to make."

In Houghton and Co. v. Nothard, Lowe and Wills (1927) 1 KB 246, at p 260, Bankes L.J. said that the authorities showed that -

"... in order to establish a case which falls within the

rule it is essential that the person who claims the benefit

of it must (a) prove that he relied upon the ostensible

authority which he sets up, and (b) must not have been put

upon inquiry as to whether the transaction was in order."

This passage was cited by Cussen A.C.J. in Efron's Tie and Knitting Mills Pty. Ltd. (in liq.) [1932] VicLawRp 3; (1932) VLR 8 where the rule was held inapplicable to a guarantee proffered by a director to a bank to secure his personal liability. Cussen A.C.J. said (at p 29):

"From the guarantee the company directly gained nothing,

but might make itself liable to the bank for the advances

past and future to Efron in respect of his private account

or accounts. It would seem from the evidence that the

giving of the guarantee was not in fact in the interests of

the company, but in the interests of the bank."

A similar case is E.B.M. Co., Ltd. v. Dominion Bank (1937) 3 All ER 555 where, although the security appeared regular in form, the circumstances were such as to put the bank on inquiry and to disentitle the bank from relying on a security purportedly given by the company and proffered by three directors in respect of their personal liabilities. Lord Russell of Killowen, delivering the judgment of the Privy Council, said (at p 569):

"For this, they have only to thank themselves, for taking as

security for the personal indebtedness of three directors

of a limited company a charge on property of that company,

without any inquiry, and without satisfying themselves that

the seal of the company had been affixed to the security in

such circumstances as to make the security a charge binding

on the company. This was not a case, as was suggested in

argument, in which the bank had no notice of anything

extraordinary being done. It was a plain case of directors

using their powers as directors to cause a limited company

to apply its property for the benefit of those directors as

debtors to the bank. The language used by ATKIN, L.J., in

Underwood (AL), Ltd. v. Bank of Liverpool ((1924) 1

KB 775), at pp 795 and 796, may well be cited in this

connection:

'The first question is: Had Underwood actual

authority to deal with the cheques as he did?

... He was using the proceeds of the cheques in

question to pay his own private debts. Under

ordinary circumstances actual authority appears

to be clearly negatived. Nevertheless it was

contended that the fact that Underwood was

the sole director, and practically the sole

shareholder, gave him, in pursuance of the

articles, actual authority. He was entrusted

with all the powers of the company, the company

can only act through its directors, and the

directors, or director if only one, could do

what they willed with the company's assets. If

this means anything it means that a board of

directors acting as such have actual authority

to defraud the company by using the company's

assets to pay debts due to butchers or

moneylenders by the individual directors. Such

an act is quite outside the class of acts -

management of the company's business -

authorised to be done by the board. The

directors, whether collectively or singly, have

not actual authority to steal the company's

goods.'"

See also Re Scottish Loan and Finance Co.Ltd., per Nicholas C.J. in Eq. at p 465. In these cases, it was the nature of the transaction which put the party purportedly dealing with the company on inquiry. Although the nature of the transaction is not the only factor which might put a party on inquiry, it is often, and importantly, the factor on which the application of the indoor management rule depends. In Rolled Steel Ltd. Slade L.J. said, at p 285:

"the very nature of a proposed transaction may put a person

upon inquiry as to the authority of the directors of

a company to effect it, even if he has no special

relationship with the company. Whether in any given case

the person dealing with the company is put on inquiry must

depend on all the particular circumstances."

19. A creditor will ordinarily be put on inquiry when his debtor offers as security a guarantee given by a third party company whose business is not ordinarily the giving of guarantees, for the execution of guarantees and supporting securities for another's liabilities, not being for the purposes of a company's business nor otherwise for its benefit, is not ordinarily within the authority of the officers or agents of the company. Of course, the circumstances may show that the giving of such a guarantee and supporting security (hereafter indifferently described as "guarantee") is for the company's benefit. For example, it may be for the benefit of solvent companies within a group to guarantee the liabilities of a holding company in order to benefit the guarantor companies as well as other members of the group. In such a case, provided the creditor has been satisfied that it is such a case, the apparently regular execution of a guarantee and supporting security may be relied on pursuant to the indoor management rule. Of course, the only but important consequence of a creditor being put on inquiry is that, in the event that an apparently regular guarantee turns out not to have been authorized by the guarantor company, the guarantor company may show that it is not bound.

20. When a creditor is put on inquiry, he cannot rely on the apparent regularity of execution of the instrument of guarantee and the indoor management rule but must be satisfied that the relevant officers and agents of the company had the company's authority to execute an instrument pledging the credit or assets of the company to guarantee another's debts. If the debtor be a director of the company, the fact that the debtor vouches for the due execution of the guarantee does not necessarily exhaust the inquiries which the creditor is bound to make, for the debtor-director may not be authorized to state the scope of his own or others' authority to the guarantee. However, where the giving of a guarantee by a company to secure another's debt is for the purposes of the company's business (as in British Thomson-Houston Co. v. Federated European Bank, Ld.) or where the circumstances are such that the company represents that the guarantee is given for the purposes of its business or for its benefit, and there are no other circumstances to put a party on inquiry, the indoor management rule applies. In re Hapytoz Pty. Ltd. (in liq.) [1937] VicLawRp 13; (1937) VLR 40 was seen to be such a case. Hapytoz' managing director executed a guarantee (which was held to have been executed in formal conformity with the articles) to secure a debt owing by another company which had a common board and common shareholders (four in number) and carried on a similar business. The creditor insisted on the guarantee as a condition of continuing to supply goods to the debtor company. Martin J. held (at p 46) that "the creditor was entitled to assume that (the managing director) had the power to give the guarantee requested." His Honour accepted the argument that "the act done was one which usually would be delegated to a managing director." It is not necessary to examine the facts of this case except to say that, had it been found that the creditor was put on inquiry, that result would not have been surprising.

21. It has been said that a forgery does not bind a company and that the indoor management rule does not avail a party who assumes the validity of a forgery: Ruben v. Great Fingall Consolidated, at p 443. That observation has given rise to some confusion in the application of the rule, the term "forgery" being used in two senses. In Ruben v. Great Fingall Consolidated, Lord Loreburn L.C. was speaking of a forgery in the strict sense, that is, of an instrument bearing a false seal or signature. As the rule is founded on estoppel, it does not cover a forgery in that sense. A company cannot give authority to fix a false seal and it is difficult to envisage a case in which there would be ostensible authority to write a false signature. It is possible that a company would be estopped from denying that a forgery in the strict sense is binding upon it, but such cases would be exceptional and would depend upon a representation that the company was bound by the forgery. On the other hand, when the seal and the signatures are genuine the question is simply whether the company has given actual or ostensible authority to the persons who affixed the seal, attested the sealing or countersigned the instrument to do so. Sometimes an instrument bearing a genuine seal and genuine signatures but executed without the authority of a company has been described as a forgery: see, for example, Kreditbank Cassel G.m.b.H. v. Schenkers (1927) 1 KB 826 and Wake's Case. If such an instrument is a forgery, it is a forgery in a looser sense. A forgery in the strict sense is binding on a company only if the company be estopped from denying both the falsity of the seal or signature and the authority of the persons affixing the false seal or writing the false signature to do so. But an instrument bearing a genuine seal and genuine signatures, though it be described as a forgery, is binding on the company if the company be estopped from denying the authority of the persons affixing the genuine seal and writing the genuine signatures to do so. Such an instrument, being regular in form, is binding on the company if it be executed for the purposes of the company's business or otherwise for the company's benefit and the party relying on it is not put on inquiry as to the authority of the persons who executed it to do so. If it transpires that the instrument was executed without the authority of the company, though it was apparently regular in form executed by officers or agents acting within the scope of their ordinary authority to execute such instruments, and used for the purposes of the company's business or otherwise for its benefit, the loss will fall on the company unless the party dealing with the company was put on inquiry. But if the party dealing with the company was put on inquiry and failed to make inquiry or, on inquiry, was not reasonably satisfied that the instrument was executed with the company's authority, the company will not be estopped from denying that it is bound by the instrument.

22. In Kreditbank Cassel, a strong Court of Appeal described as forgeries bills of exchange purportedly drawn and indorsed by Schenkers Ltd. and signed by the company's Manchester manager: "S. Clarke, Manchester Manager". The bills, accepted by a company in which Clarke was interested, were used to pay a creditor of that company in attempted fraud of Schenkers Ltd. Schenkers Ltd. repudiated the bills. By treating the bills as forgeries, the operation of Ruben v. Great Fingall Consolidated was attracted to take the case out of the indoor management rule but, in my respectful opinion, the case was never within that rule. Clarke, as the Manchester manager of Schenkers Ltd., had no ostensible authority to draw and indorse bills on behalf of that company. Atkin L.J. said (at p 843):

"Much depends, of course, upon the evidence as to the nature

of the business and the actual position occupied by the

particular person. But in the absence of evidence I am not

prepared to hold that the manager of a provincial branch,

even if he is in such an important position as manager of

the Manchester branch of a forwarding agency, has authority

to draw bills to bind his company."

If Clarke had no ostensible authority to draw bills to bind the company, a fortiori he had no such authority when the bills were to be used to pay the debts of another company in which he was personally interested. The nature of the transaction was enough to put the creditor to whom the bills were indorsed on inquiry as to Clarke's authority, and none was made of the company. Had Clarke drawn and indorsed the bills and used them to pay for a trading debt incurred by Schenkers Ltd. in carrying on its business in Manchester, the bills would not have attracted the description of forgery, though Clarke would have been equally without authority to draw and indorse bills.

23. There are two other aspects of the judgments in Kreditbank Cassel which should be mentioned. First, Scrutton L.J. expressed some caution about a general proposition which had been advanced by Sargant L.J. in Houghton and Co. v. Nothard, Lowe and Wills (with the concurrence of Atkin L.J.) that a party dealing with a company could not invoke the indoor management rule to rely on a purported delegation of authority to an officer unless the party had knowledge of the article permitting delegation. Atkin L.J. adhered to what had been said in Houghton and Co. v. Nothard, Lowe and Wills. But the proposition, if applied generally, is too wide. It must be understood as applying only to cases of the kind to which Diplock L.J. referred in Freeman and Lockyer; that is, to cases where the authority purportedly exercised by an officer or agent exceeds that which would normally be conferred on an officer or agent in that position. In such a case, as Diplock L.J. pointed out (at p 508), the party relying on the authority of the officer or agent must prove -

"that the representation on which he in fact relied as

inducing him to enter into the contract comprised the

articles of association of the company as well as the

conduct of the board (and) it would be necessary for him to

establish first that he knew the contents of the articles

... and secondly that the conduct of the board in the light

of that knowledge would be understood by a reasonable man

as a representation that the agent had authority to enter

into the contract sought to be enforced ..."

24. Next, in Kreditbank Cassel the test of vicarious liability for a servant's fraud seems to have been equated with the criterion for determining whether a company is bound by an act done by a servant purportedly on behalf of, but in fraud of, the company: see per Scrutton L.J. at pp 839-840. His Lordship referred to the decision of the House of Lords in Lloyd v. Grace, Smith and Co. [1912] UKHL 1; (1912) AC 716 for the proposition "that a principal is liable for the fraud of his agent acting within the scope of his authority, whether the fraud is committed for the benefit of the principal or for the benefit of the agent." Lord Macnaghten had said (at p 738):

"The only difference in my opinion between the case where

the principal receives the benefit of the fraud, and the

case where he does not, is that in the latter case the

principal is liable for the wrong done to the person

defrauded by his agent acting within the scope of his

agency; in the former case he is liable on that ground and

also on the ground that by taking the benefit he has

adopted the act of his agent; he cannot approbate and

reprobate."

But vicarious liability for an agent's tort is different from personal liability imposed by an agent's doing of an act binding on the principal. Where the fraud of an agent consists, so far as the party with whom he is dealing is concerned, in the misrepresentation of his own authority, the company whose authority he purports to exercise may or may not be affected by the misrepresentation. Either the company has held the agent out as having authority to represent his own authority or it has not. If the company has so held the agent out, the other party may be able to hold the company to the agent's representation of his authority by estoppel, so that the agent's claim of authority is fulfilled: see Crabtree-Vickers, at p 78. If the company has not so held the agent out, the agent has no authority from the company to misrepresent his own authority; he cannot bind the company by his own statement of his authority and any loss suffered by the other party cannot be sheeted home to the company. The point of Lloyd v. Grace, Smith and Co. is that a master is answerable for the wrong of a servant or agent committed in the course of the service or agency. But a servant's or agent's representation of authority is never, by itself, sufficient to establish the course of the service or agency and, if the act done is neither within the actual nor within the ostensible authority of the servant or agent, the principal is not liable. Lloyd v. Grace, Smith and Co. is concerned not with fraud by misrepresentation of the servant's or agent's authority but with other fraud committed within the course of the service or agency.

25. It is convenient now to state in summary the position of a creditor who takes a company's guarantee for another's debt. If the guarantee is not executed in apparent conformity with the formalities prescribed by the company's constitution, the guarantee is void. If the guarantee is executed in apparent conformity with those formalities, the validity of the guarantee can be assumed if (i) it is executed by officers or agents who would ordinarily be expected to have authority to do so, (ii) the guarantee is given for the purposes of the company's business or otherwise for the company's benefit, and (iii) there are no circumstances which put the creditor on inquiry as to the authority of those who executed the guarantee to do so. If these conditions are not met, the creditor must satisfy himself as to the authority of the persons who executed the guarantee to do so. The inquiry must be made of the appropriate officers of the company. The persons who executed the guarantee might, but will not usually, have authority to satisfy the creditor's inquiry. If the creditor, being put on inquiry, makes no inquiry or is not reasonably satisfied as to the authority of the persons who executed the guarantee to do so, the company is not estopped from repudiating the guarantee for want of authority on the part of those who executed it. If the creditor is not put on inquiry, he may assume that the guarantee was executed with the company's authority and, once he acts on that assumption to his detriment, the company is estopped from denying the validity of the execution of the guarantee. The same consequence follows if the creditor, having inquired, is reasonably satisfied by the company's response that those who executed the guarantee had the company's authority to do so. Where authority to execute the guarantee depends upon an antecedent resolution of the board, a creditor who is put on inquiry must be reasonably satisfied that the resolution was duly passed.

26. A creditor who, putting a guarantee in issue, seeks to rely on the indoor management rule is concerned to establish the due execution of the guarantee. In this context, the indoor management rule relates to authority to execute a guarantee, not to the discharge of the fiduciary duty of a board of directors who might authorize its execution. In Rolled Steel Ltd., at pp 291-296, Slade L.J. considered whether a party who is on notice that the directors are in breach of their fiduciary duty in a transaction can rely on the directors' ostensible authority and hold the company to the transaction. It is unnecessary to consider that question in this case. I should wish to reserve my opinion as to whether, in a case similar to Rolled Steel Ltd., the creditor might be precluded from enforcing the guarantee by reason of the unavailability of an estoppel as to its due execution (as I understand Slade L.J. to hold) or by reason of his taking a guarantee which, though its due execution may be assumed or established, is taken with notice that it is given in breach of the directors' fiduciary duty.

27. In this case, the problem is not whether Barclays, with notice of a breach of fiduciary duty on the part of the directors of Northside, could enforce an otherwise binding instrument of guarantee; the problem is simply whether the company is estopped from showing that the instrument of guarantee was sealed, attested and countersigned without authority. The instrument of mortgage was given to Barclays not for the purposes of Northside's business nor for Northside's benefit. It was given to secure the debts of Robert Sturgess' companies. That was enough to put Barclays on inquiry. In the Supreme Court, Young J. said:

" This case ... is one where a company is mortgaging its

sole asset for the benefit of one director and the document

in question is part of a transaction involving a large sum

of money, and the document proffered to Barclays was signed

only by persons who were connected with the borrowers. In

those circumstances it seems to me that as a matter of fact

the transaction itself called upon the lender to make

inquiries, so that the rule in Turquand's case is

inapplicable."

I respectfully agree. In the Court of Appeal, Kirby P. held that the rule in Turquand's Case requires "that courts should not too readily demand astuteness on the part of those dealing with companies to discern suspected impropriety or lack of capacity on the part of company's officers" and found that Barclays was not put on inquiry. McHugh J.A., with whom Samuels J.A. agreed, noted that it is "common enough for an asset of one company to be given as security for an advance to an associated company" and he observed that "(t)he beneficial effect of the indoor management rule would be greatly reduced if an outsider had to approach each corporate transaction with a mind alveolated with suspicion. To do so would increase the cost of doing business with a corporation. It would cause considerable inconvenience to corporations if they were required to answer every inquiry concerning the authority of their officers." His Honour expressed the opinion that "it is not enough (to put an outsider on inquiry) that a director who attested the mortgage is the managing director of an apparently associated company which will obtain a benefit, direct or indirect, from the execution of the relevant document." With great respect, I disagree.

28. To state the indoor management rule more widely than I have stated it would be to furnish a charter for dealings between fraudulent officers of companies and supine financiers; to state it more narrowly would be to put a clog on the free flow of legitimate commerce. If it be said that the rule, so stated, is too restrictive in putting a lender on notice when a company's guarantee is proffered otherwise than for the purposes of the guarantor's business or for the guarantor's benefit, the short reply is that an inquiry as to the passing of an authorizing resolution in a genuine case is likely to ensure the board's conscious assumption of collective responsibility for the giving of the guarantee. The company, its shareholders and creditors are not likely to be disadvantaged by that course. The rule has its familiar scope of operation in transactions entered into for the purposes of a company's business or otherwise for its benefit.

29. One further point should be mentioned. Gerard Sturgess was not appointed as secretary of the company, though a return was lodged with the Corporate Affairs Commission purporting to state that he had been so appointed. It is not necessary to examine whether, if the only irregularity in the exercise of the instrument of mortgage had been the signature of Gerard Sturgess instead of the person earlier appointed as secretary of the company, the lodging of the return or the company's failure to correct it may have been sufficient to estop the company from denying that Gerard Sturgess possessed the authority of the secretary to countersign. The indoor management rule was displaced by more substantial considerations. The transaction was such that Barclays ought to have made an inquiry of the board of Northside to ascertain whether the board had authorized the execution of the instrument or mortgage. Had that inquiry been made a negative answer would have been inevitable. At the trial before Young J. no evidence was led of the making of any inquiry. Northside was therefore not estopped from showing that the instrument of mortgage was executed without its authority and was not its instrument.

30. The first respondent sought to escape liability under s.127 of the Real Property Act by submitting that Northside was bound by the instrument of mortgage by operation of s.51A(1) of the Conveyancing Act 1919 (N.S.W.) or of s.106 of the Real Property Act. I agree with the reasons of the Chief Justice for rejecting this submission.

31. As Northside was not estopped from showing that the instrument of mortgage was not its instrument, the appeal must be allowed and the judgment of Young J. restored. I agree with the order proposed by the Chief Justice.

DAWSON J. The appellant company, Northside Developments Pty. Limited, was incorporated in 1965 for the purpose of holding some six acres of land north of Sydney. The shareholders of the company were John Lees, Robert Ellis and Rogard Pty. Limited. The last was a company controlled by Robert Sturgess. The directors of Northside Developments Pty. Limited were Robert Sturgess, Lees and Ellis. The land held by that company was zoned for use as open space and the shareholders no doubt hoped that it would some day be zoned for residential use thereby enabling the company to make a substantial profit upon sale. The only function of the company was to hold the land. The administration of the company was minimal and was left in the hands of Robert Sturgess who, in turn, left it to a firm of accountants. For some years until 1979 a member of the firm of accountants, Robert Horder, acted as secretary of the company, although it does not appear that he was ever formally appointed to that position. All that the firm of accountants did in relation to Northside Developments Pty. Limited was to pay the rates, write the minutes of fictitious meetings and file statutory returns.

2. During September 1979, Robert Sturgess successfully sought a loan from Barclays Credit Corporation Holdings Pty. Limited ("Barclays") on behalf of certain companies controlled by him, mainly in connection with a car yard which he operated in Sydney. Neither the car yard nor the companies had any connection with Northside Developments Pty. Limited. A loan agreement was executed on 24 December 1979. At the same time a document dated 24 December 1979 was executed whereby Northside Developments Pty. Limited purported to mortgage its land as security for the repayment of the loan. The document bore the common seal of the company which was said to be "hereunto affixed by authority of the board of directors in the presence of the Secretary". The seal was accompanied by the signature of Robert Sturgess as a director and was countersigned by Gerard Sturgess as secretary. Gerard Sturgess is the son of Robert Sturgess.

3. It is necessary to go back a little. During 1979, as the result of a policy decision, the firm of accountants which had been managing the affairs of Northside Developments Pty. Limited no longer wished to do so. On 14 November 1979, Horder signed a document recording his resignation as secretary of the company. On about the same date, Gerard Sturgess signed a consent to act as secretary and, on 22 November 1979, a statutory return of the change of secretary was lodged with the Corporate Affairs Commission. On 3 August 1979, the certificate of title to the land held by Northside Developments Pty. Limited was obtained by Robert Sturgess from the solicitors previously acting for that company. Until 1979 the common seal of Northside Developments Pty. Limited had been kept with the firm of accountants which administered its affairs. At some time before 24 December 1979, the accountants sent the seal to the solicitor acting for Robert Sturgess in his negotiations with Barclays. The mortgage was probably executed in the solicitor's office, Robert Sturgess and Gerard Sturgess both being present.

4. The mortgage was subsequently registered and, default having been made under the loan agreement with Barclays, that company as mortgagee sold the land on 31 December 1980 to Stanley Raymond Harvey, who became the registered proprietor. Northside Developments Pty. Limited did not receive any of the money - some $1,400,000 - lent by Barclays.

5. It was found by the learned trial judge that at the time that Robert Sturgess purported to have Northside Developments Pty. Limited execute the mortgage to Barclays, both he and Gerard Sturgess were aware that they needed to obtain the consent of their co-directors, Lees and Ellis, and that such consent had not been obtained.

6. The articles of Northside Developments Pty. Limited provided that:

"Subject to the power to delegate conferred by Article 47

the Directors shall provide for the safe custody of the Seal

and the Seal shall never be used except by the authority of

the Directors and in the presence of one Director at the

least who shall sign every instrument to which the Seal is

affixed and every such instrument shall be countersigned by

the Secretary or by a second Director or some other person

appointed by the Directors for the purpose."

It does not appear that there was any delegation pursuant to Art.47, which allowed the directors to delegate any of their powers to committees of directors. There was no resolution of the directors authorizing the use of the seal to execute the mortgage.

7. Northside Developments Pty. Limited brought these proceedings claiming damages against the Registrar-General pursuant to s.127 of the Real Property Act 1900 (N.S.W.). That section provides for an action to be brought against the Registrar-General as a nominal defendant for the recovery of damages by a person suffering loss through the registration of another person as the proprietor of land, subject to certain exceptions which are not material. Damages were awarded at first instance but upon appeal to the Court of Appeal it was held that the rule in The Royal British Bank v. Turquand (1856) 6 El. and Bl. 327 [1856] EngR 470; (119 ER 886) applied with the result that the mortgage was effective to bind Northside Developments Pty. Limited and to encumber the land held by it. The company appeals to this Court.

8. The rule in The Royal British Bank v. Turquand established that persons dealing with a company have constructive notice of the requirements of its memorandum and articles of association and, as Lord Hatherley put it in Mahony v. East Holyford Mining Co. (1875) LR 7 HL 869, at p 894, "when there are persons conducting the affairs of the company in a manner which appears to be perfectly consonant with the articles of association, then those so dealing with them, externally, are not to be affected by any irregularities which may take place in the internal management of the company". Earlier, Lord Hatherley had referred (at p 894) to the "indoor management" of a company and thus the rule is known also as the indoor management rule.

9. The rule in The Royal British Bank v. Turquand has been applied in a number of cases, not all of which are entirely reconcilable, but for present purposes it is necessary only to have regard to the relevant limits to which the rule is said to be subject. It does not apply where there are suspicious circumstances sufficient to place a person dealing with the company upon inquiry and it is said that it does not apply where a document sealed or signed on behalf of the company is a forgery.

10. It is convenient to examine first why the rule is said not to apply in cases of forgery. In Ruben v. Great Fingall Consolidated (1906) AC 439 the secretary of the respondent company fraudulently issued to the plaintiffs a certificate for shares in the company as security for a loan to him. He affixed the seal of the company to the share certificate and forged the signatures of two directors. He countersigned the document with his own signature. The plaintiffs unsuccessfully claimed to be entitled to be registered as the owners of the shares. Lord Loreburn L.C., at p 442, observed that the transaction was not for the benefit of the respondent company but solely for the private purposes of the secretary and, at p 443, he said:

"I cannot see upon what principle your Lordships can

hold that the defendants are liable in this action. The

forged certificate is a pure nullity. It is quite true that

persons dealing with limited liability companies are not

bound to inquire into their indoor management, and will not

be affected by irregularities of which they had no notice.

But this doctrine, which is well established, applies only

to irregularities that otherwise might affect a genuine

transaction. It cannot apply to a forgery."

Lord Davey, at p 446, referred to the proposition laid down by Willes J. in Barwick v. English Joint Stock Bank (1867) LR 2 Ex 259, at p 265, that the "general rule is, that the master is answerable for every such wrong of the servant or agent as is committed in the course of the service and for the master's benefit".

11. Of course, Ruben v. Great Fingall Consolidated was decided before Lloyd v. Grace, Smith and Co. [1912] UKHL 1; (1912) AC 716 in which the validity of the dictum of Willes J. was, as a general proposition, denied. It was held that a principal is liable for the fraud of his agent acting within the scope of his authority, whether the fraud is committed for the benefit of the principal or for the benefit of the agent. But as Lord Macnaghten observed in Lloyd v. Grace, Smith and Co., at p 738, the fact that the fraud in Ruben v. Great Fingall Consolidated was not for the benefit of the company was something which was not necessary for the decision. In saying that the indoor management rule applied only to irregularities which might otherwise affect a genuine transaction, Lord Loreburn must in Ruben v. Great Fingall Consolidated be taken to have been referring to transactions carried out with the authority of the company, either actual or ostensible, apart from any irregularity under the articles.

12. Forgery is not confined to a seal or signature which is counterfeit. As Kreditbank Cassel G.m.b.H. v. Schenkers (1927) 1 KB 826 shows, a document which is false and is sealed or signed in fraud of a company will be a forgery notwithstanding that the seal is the actual seal of the company or the signature is the actual signature of the person signing. In that case the branch manager of the defendant company fraudulently and, as it was found, without any actual or apparent authority, drew bills of exchange to the order of the company, signing them on behalf of the company with his own signature and subsequently indorsing them on behalf of the company. It was held that the plaintiffs could not invoke the indoor management rule because the bills were forgeries. Ruben v. Great Fingall Consolidated was applied. Bankes L.J. said, at pp 835-836:

"In my opinion there was no evidence in this case upon which

an estoppel could be founded. It seems to me to have been

proved that the bills are forgeries, and there being no

evidence of estoppel, the plaintiffs cannot rely upon the

rule laid down in Mahony v. East Holyford Mining Co. They

are then driven to rely, if they can, upon the ordinary rule

applicable in the case of principal and agent. If they

could have shown that the drawing and indorsing of bills of

exchange was within the ostensible authority of a person

occupying the position which this branch manager occupied,

they might have been in a position to establish a claim

founded upon that ground. No such evidence was given, and I

certainly am not prepared to accept the proposition that it

was within the ostensible authority of this branch manager,

having regard to his position, to sign bills to this amount

and in this form."

And Scrutton L.J., at p 840, referring to Ruben v. Great Fingall Consolidated, said:

"In the present case the bills are clearly forgeries within

the Forgery Act, 1913, as they contain a false statement -

namely, that Clarke was acting for the company, and they

purport to bind the company in fraud of the company. That

being so, I feel bound by the decision of the House of Lords

to hold that it is not open to the present plaintiffs to

say: 'The question whether authority has been delegated

to Clarke, the Manchester manager, is a matter of internal

management about which we need not inquire under the rule in

Turquand's case.'"

13. In South London Greyhound Racecourses Ltd. v. Wake (1931) 1 Ch 496 the managing director and the secretary of the plaintiff company fraudulently and for their own purposes procured the issue to the defendant of a certificate that he was the holder of shares in the company. The share certificate was sealed with the seal of the company and attested by the signatures of the managing director and secretary. The articles of the company provided that the seal of the company should not be affixed except by the authority of a resolution of the board of directors and in the presence of at least one director and the secretary. The company successfully contended that the defendant was not entitled to the shares. Clauson J. said, at p 506:

"I conceive that if the certificate is binding on the

company in the sense of being a document which has, in

truth, been sealed by the company, whether by a duly

authorized agent or by a person whom the company cannot be

heard to allege to be other than a duly authorized agent, it

may well be that the certificate estops the company from

setting up the true facts and from alleging that Wake never

became transferee of the shares and accordingly has no title

to them; and if that were the case, I conceive I should be

bound to refuse the company the relief it asks."

But, as Clauson J. went on to point out, the share certificate was a forgery and, the seal having been affixed by the director and secretary without authority, actual or ostensible, there was no transaction to which the indoor management rule might be applied in order to cure any irregularity. As he observed, at p 510, the "certificate being a mere nullity, there is nothing in the existence of the certificate to prevent the company from setting up the true facts". The decision has been criticized upon the basis that it must be within the apparent authority of a director and secretary to authenticate share certificates (see Pennington, Company Law, 5th ed. (1985), p 137) but it is clear (at pp 508-509) that Clauson J. proceeded upon a contrary basis.

14. At one time it seems to have been thought to be an open question whether the existence of an article conferring the power to delegate authority to a person to act on behalf of a company might of itself enable that authority to be presumed under the indoor management rule. See Campbell, "Contracts with Companies", (1960) 76 Law Quarterly Review 115, at p 123. There is support to be found in various dicta for the proposition that an outsider who deals with a person to whom authority might be delegated is, at least if he has knowledge of the relevant article, entitled to presume that the delegation has taken place: Biggerstaff v. Rowatt's Wharf Limited (1896) 2 Ch 93, at p 102; Kreditbank Cassel G.m.b.H. v. Schenkers, at pp 832-833; Rama Corporation Ltd. v. Proved Tin and General Investments Ltd. (1952) 2 QB 147, at p 168. Equally there are dicta the other way saying that a person must be held out by a company to have authority before the exercise of power under the articles to delegate the authority might be presumed: see, e.g., Kreditbank Cassel G.m.b.H. v. Schenkers, at p 843; British Thomson-Houston Co. v. Federated European Bank Ltd. (1932) 2 KB 176, at p 182. A similar conflict was at one time apparent in this country: The Goulburn Valley Butter Factory Company Proprietary Limited v. The Bank of New South Wales (1900) 25 VLR 702, at pp 715-716; In re Hapytoz Pty. Ltd. (in liquidation) [1937] VicLawRp 13; (1937) VLR 40, at p 46; cf. Re Scottish Loan and Finance Co. Ltd. (1944) 44 SR(NSW) 461.

15. But the notion that potential authority under an article might, without more, be treated as actual authority by an outsider to the company who knows of the article was something which obviously went beyond the reasonable requirements of business convenience and was difficult to sustain upon principle.

16. This was made clear by Sargant L.J. (in whose judgment Atkin L.J. concurred) in Houghton and Co. v. Northard, Lowe and Wills (1927) 1 KB 246. In that case, a single director of two companies, both engaged in fruit trade, entered into an agreement with a firm of fruit brokers (the plaintiffs) that in exchange for a loan to one company the brokers would have the right to sell on commission all the fruit imported by both companies, and that 70 per cent of the net proceeds of the sale of both companies could be retained as security for the advance. The director had no actual authority from that company which was not the recipient of the loan (the defendant company). The brokers sought confirmation of the agreement from the defendant company itself but the only confirmation received was from the defendant company's secretary, who had no actual authority to confirm the agreement.

17. The articles of association contained a wide power, vested in the board of directors, to delegate their power to enter into the type of transaction in question to any person, including a single director or the secretary. The plaintiffs did not know of this power of delegation and the power had not in fact been exercised. At first instance, Wright J. took the view that the plaintiffs were entitled to treat the question of whether the power to delegate had been exercised as a matter of internal management only and to assume that the director and secretary in fact possessed the power they purported to exercise by entering into the transaction, so that their actions could bind the company.

18. The Court of Appeal reversed the decision of Wright J. Sargant L.J. rejected the notion that the indoor management rule could be so applied, even had the plaintiffs had actual and not merely constructive knowledge of the power of delegation in the articles of association. To extend the scope of the operation of the rule in this way would be -

"to carry the doctrine of presumed power far beyond anything

that has hitherto been decided, and to place limited

companies, without any sufficient reason for so doing, at

the mercy of any servant or agent who should purport to

contract on their behalf. On this view, not only a director

of a limited company with articles founded on Table A, but a

secretary or any subordinate officer might be treated by a

third party acting in good faith as capable of binding the

company by any sort of contract, however exceptional, on the

ground that a power of making such a contract might

conceivably have been entrusted to him." (at pp 266-267)

Atkin L.J. confirmed this view in Kreditbank Cassel G.m.b.H. v. Schenkers (at pp 842-843):

"... it is said: 'You, the defendants, are a limited

company, and as such you are in a much more awkward position

than if you were a firm, because you have an article in

your articles of association empowering the directors to

determine who may sign bills of exchange on behalf of the

company, and, therefore, any one who purports to sign a bill

of exchange in the name of the company is deemed to have

authority to do so.' Carried to its logical conclusion,

that would be a most alarming doctrine for companies, for

any one who has the pen of a ready writer need only sit down

and write a bill of exchange in the name of a company having

an article in this form, and the company would, presumably,

be bound when the bill got into the hands of a holder for

value without notice, even although the bill was an absolute

forgery. The article cannot have that extended bearing, and

if some limitation were not placed upon it, not merely the

office boy but any one might purport to sign on behalf of

the company. Such a view is not correct."

An office boy purporting to sign a cheque on behalf of a company would ordinarily place an outsider upon inquiry, but the point is nevertheless clearly made. It is true that Atkin L.J. goes on to give the indoor management rule an application which is somewhat inconsistent with the judgment of Sargant L.J. in Houghton. But the judgments in Kreditbank were, unlike those in Houghton, unreserved and the view of Sargant L.J., with whom Atkin L.J. agreed unequivocally in Houghton, is clearly to be preferred. The correct view is that the indoor management rule cannot be used to create authority where none otherwise exists; it merely entitles an outsider, in the absence of anything putting him upon inquiry, to presume regularity in the internal affairs of a company when confronted by a person apparently acting with the authority of the company. The existence of an article under which authority might be conferred, if it is known to the outsider, is a circumstance to be taken into account in determining whether that person is being held out as possessing that authority. It may be consistent with that person having the authority which he purports to have. There must, however, be something more than the mere existence of a power within the articles, for instance the power to delegate (which may or may not have been exercised), upon which to base an apparent exercise of authority which will bind the company. And, of course, knowledge of such an article is not essential for the application of the indoor management rule where apparent authority can be established without reliance upon it.

19. In other words, the indoor management rule only has scope for operation if it can be established independently that the person purporting to represent the company had actual or ostensible authority to enter into the transaction. The rule is thus dependent upon the operation of normal agency principles; it operates only where on ordinary principles the person purporting to act on behalf of the company is acting within the scope of his actual or ostensible authority.

20. Whatever the controversy which may previously have existed, the decision in Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd. (1964) 2 QB 480 has ensured that it is the latter view which has prevailed. Indeed, in Freeman and Lockyer Diplock L.J. preferred to speak entirely in terms of actual or ostensible authority to bind a company and to avoid any express reference to the rule in The Royal British Bank v. Turquand. But it is clear from his judgment (and that of Willmer L.J. at p 496) that, where an outsider dealing with a company relies upon the ostensible authority of some person purporting to act as its agent, an article permitting that authority to be delegated to the agent will be significant for two reasons. First, whether the article is known to the outsider or not, it will establish that the delegation and exercise of the authority is intra vires. Secondly, where the existence of the article is known to the outsider, it will be relevant as part of the holding out by the company of the person as its agent. Of course, as Diplock L.J. points out, the company will hold the person out as having the authority to act as agent if it either expressly represents that he is so authorized or permits him to act as if he were so authorized, particularly where it permits him to act in a position which ordinarily carries such authority with it. In those circumstances the company will be estopped from denying the agent's authority whether or not - and this is the indoor management rule to which Diplock L.J. found it unnecessary to refer - the procedures have been observed which are required to be followed internally in order to confer actual authority upon the agent. Although not expressly referring to the indoor management rule, Diplock L.J. (at p 508) took as confirmation of his view the dictum of Atkin L.J. in Kreditbank Cassel G.m.b.H. v. Schenkers, at p 844:

"If you are dealing with a director in a matter in which

normally a director would have power to act for the company

you are not obliged to inquire whether or not the

formalities required by the articles have been complied with

before he exercises that power."

Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd. has been applied by this Court in Crabtree-Vickers Pty. Ltd. v. Australian Direct Mail Advertising and Addressing Co. Pty. Ltd. (1975) 133 CLR 72 and there is no reason to doubt the principles which it lays down.

21. In applying these principles in the case of forgery, it is necessary to distinguish between forgery which involves a counterfeit signature or seal and that which does not. A counterfeit signature or seal purports to be that which it is not, not because of any lack of authority, but simply because it is false. There is no representation that the forger is authorized to act as an agent and there is no room for the application of the indoor management rule. The forgery is truly a nullity. In Ruben v. Great Fingall Consolidated there were counterfeit signatures and it was in that context that Lord Loreburn said that the indoor management rule did not apply because it "applies only to irregularities that otherwise might affect a genuine transaction". Of course, if a company represents that a counterfeit signature or seal is genuine, it may be estopped from denying its authenticity.

22. But, as I have said, there may be a forgery where no counterfeit signature or seal is involved - where, for example, a person without actual or ostensible authority purports to sign a document on behalf of a company or affixes its seal to it with intent to defraud. There is then a false document made with the intention that it should be acted upon as genuine and that constitutes a forgery. What if, notwithstanding the fraudulent intent, there is ostensible authority, although no actual authority, to sign or seal the document on behalf of a company? Would the document then constitute a forgery? There have been mixed answers given to the last question: cf. Campbell, op. cit., at pp 135-136; Thompson, "Company Law Doctrines and Authority to Contract", (1956) 11 University of Toronto Law Journal 248, at pp.274-275. The answer is, however, of no real consequence for the purposes of the application of the indoor management rule. Clearly, if the person who signs the document or affixes the seal is held out by the company as having authority to act for it, an outsider dealing with that person is entitled to presume that the company correctly observed the procedures available to it to place the person in that position and the company would be estopped from denying his authority. If, whatever may be the position in the criminal law, the document is not in those circumstances to be regarded as a forgery, then the statement of Lord Loreburn that the indoor management rule cannot apply to a forgery is correct in a quite general sense.

23. In Slingsby v. District Bank Ltd. (1931) 2 KB 588, at p 605, at first instance, Wright J. said:

"Though a man may be estopped by conduct from denying

that a forgery is his signature, yet as forgery is a crime

he cannot authorize it in advance (if indeed it is not a

contradiction in terms to authorize a forgery) without being

an accessory before the fact. Nor can he agree to be bound

by it subsequently, so as to shield a criminal or compound a

felony. Hence an act of forgery is a nullity and outside

any actual or ostensible authority, and outside the

principle of Lloyd v. Grace, Smith and Co."

But the basis of the doctrine of ostensible authority is estoppel and there is no reason why a person should not, by reason of having held someone out as possessing authority, be precluded from asserting a forgery on the part of the latter. This was pointed out by Sir Wilfrid Greene M.R. in Uxbridge Permanent Benefit Building Society v. Pickard (1939) 2 KB 248, at p 256, when he said:

"The cases of Ruben v. Great Fingall Consolidated;

Kreditbank Cassel v. Schenkers; and Slingsby v. District

Bank (one of them in the House of Lords and the other two in

this Court) appear to me to make it quite clear that in the

view of the learned judges who dealt with the matter the

question of the effect of a forged instrument as affecting

the principal falls within the question of ostensible

authority. I can find no justification in any of the

observations in those cases for the suggestion that a

forgery, if in other respects it comes within the scope of

ostensible authority, in any way prevents that doctrine from

applying."

Uxbridge Permanent Benefit Building Society v. Pickard was, of course, a case which was concerned with the uttering of forged documents by an employee in the course of his employment rather than the actual forging of a document by the employee.

24. Nor is there any warrant for treating the affixation of the seal of a company as attracting some special application of the indoor management rule. Whilst a company's seal may be authentic evidence of what a company has done or agreed to do (see The Mayor of Ludlow v. Charlton (1840) 6 M. and W. 815, at p 823 [1840] EngR 234; (151 ER 642, at p 645)), if it is affixed without authority, actual or ostensible, it is a forgery and the company is not bound by it: Bank of Ireland v. Evans' Trustees [1855] EngR 714; (1855) 5 HLC 389, at p 408 [1855] EngR 714; (10 ER 950, at p 958); Mayor, andc., of Merchants of the Staple of England v. Governor and Company of Bank of England (1887) 21 QBD 160.

25. It adds nothing to speak of "the peculiar significance of the common seal as the external physical symbol of an act of the body corporate itself - a corporate act": Lindgren, "The Positive Corporate Seal Rule and Exceptions Thereto and the Rule in Turquand's Case", [1973] MelbULawRw 18; (1973) 9 Melbourne University Law Review 192, at p 194. That view must depend on treating the act of affixing the seal as an act, not simply of an agent, but of an organ of the company itself. The organic theory, which was originated by Lord Haldane L.C. in Lennard's Carrying Company Limited v. Asiatic Petroleum Company Limited (1915) AC 705, at pp 713-714 (see also H.L. Bolton (Engineering) Co. Ltd. v. T.J. Graham and Sons Ltd. (1957) 1 QB 159, at pp 172-173, and The Lady Gwendolen (1965) P 294, at pp 342-345, 355-356), has been used to impose liability upon companies beyond that which could be imposed by the application of the principles of agency alone. It is an approach which has been particularly useful in criminal cases where the liability of a company has depended upon a mental element: Director of Public Prosecutions v. Kent and Sussex Contractors Ltd. (1944) KB 146; R. v. I.C.R. Haulage Ltd. (1944) KB 551; John Henshall (Quarries) Ltd. v. Harvey (1965) 2 QB 233; Reg. v. McDonnell (1966) 1 QB 233. But the organic theory merely extends the scope of an agent's capacity to bind a company and there must first be authority, actual or apparent. It is only then that a person may be regarded not only as the agent of a company, but also as the company itself - an organic part of it - so that "(t)he state of mind of (the agent) is the state of mind of the company": H.L. Bolton (Engineering) Co. Ltd. v. T.J. Graham and Sons Ltd., per Denning L.J. at p 172. Thus the application of the theory depends in the first instance upon there being authority, that is to say, agency. This point is made in the third edition of Gower's The Principles of Modern Company Law, (1969), at pp 150-151:

"Even if the officials are treated as organs, this

does not obviate the need to comply with the basic principle

of agency law that their acts bind the company only if they

are within the actual, usual, or apparent scope of the

officials' authority. The 'organic' theory is used to avoid

the difficulty that in some cases an agent, even when acting

within the scope of his authority, cannot bind the

principal; it in no way affects the other rule that a

principal is never liable if the agent is acting outside

that authority. Just as a natural person may not be

responsible for the acts of his organs if he has no control

over them, so a company cannot be liable for its organs

unless they are acting as such."

See also Smorgon v. Australia and New Zealand Banking Group Ltd. [1976] HCA 53; (1976) 134 CLR 475, at pp 482-483.

26. A body corporate can only act through agents, even in the affixation of a seal, and, if a person who is not authorized, or held out as being authorized, to enter into a transaction on behalf of a company purports to do so by affixing the company's seal to a document, the company will not be bound. The document will be a forgery, even if the person concerned would, were the transaction one which he had authority to conclude on behalf of the company, be a person authorized to carry out the physical affixation of the seal. Obviously, if a person has been given general authority to affix the seal of a company that authority does not extend to any transaction whatsoever; it must be limited to those transactions into which the company has decided to enter. In other words, authority to affix the seal is not the same thing as authority to determine those documents to which the seal should be affixed. Of course, as I have said, if a person has apparent authority to enter into a transaction and pursuant to that authority affixes the company's seal to a document, the indoor management rule may allow an outsider dealing with that person to presume that the seal is affixed in accordance with the requirements of the articles, that being a matter of internal regulation.

27. Thus, where a company has been held to be bound by the affixation of its seal by a person without actual authority, it has been because that person has been held out by the company as acting on its behalf in the transaction in which the seal is used. In re County Life Assurance Company (1870) LR 5 Ch App 288 was a case in which the articles of association of a life assurance company named a managing director and a board of directors. The directors named refused to act and passed a resolution that the company should not carry on business. Notwithstanding this, the person named as managing director and one of the shareholders persisted in carrying on business at the registered office of the company. They chose directors in place of those who refused to act, appointed a secretary and allocated shares. The company issued policies which were sealed with the seal of the company and signed by the managing director, two of the persons purporting to act as directors and the person purporting to act as secretary. By the articles the directors were appointed to hold office until the first ordinary meeting of the company and in the meantime they were to have power to appoint other qualified persons as directors in addition to, or in substitution for, any of their number. The subscribers to the memorandum were aware that business was being carried on in the company's name. The company was held to be bound by one of the policies which it issued. The persons purporting to act as directors of the company were in the position of de facto directors, that is, were held out by the company as being directors and, therefore, authorized to carry on the business of the company. As Giffard L.J. said, at pp 293-294:

"The company is bound by what takes place in the usual

course of business with a third party where that third party

deals bona fide with persons who may be termed de facto

directors, and who might, so far as he could tell, have been

directors de jure. In this case the ordinary correspondence

takes place, then the applicant goes to the office and gets

from the office a document which appears, on the face of it,

to be executed according to the terms of the articles, and

which has to it a seal which purports to be the seal of the

company, that seal being put by three persons who represent

themselves to be directors, and who are de facto directors,

and countersigned by the person who was de facto secretary."

28. In County of Gloucester Bank v. Rudry Merthyr Steam and House Coal Colliery Company (1895) 1 Ch 629 the company's seal was affixed to a mortgage by the secretary of the company. The secretary was authorized to affix the seal to the mortgage at a meeting of the board of directors at which only two directors were present. The directors had made a regulation that a quorum of three directors should be necessary for the validity of their acts. The company was held to be bound by the mortgage. Clearly the secretary was held out as having the authority to affix the seal to the mortgage, the quorum at a directors meeting being a matter of internal management only. As Lord Halsbury said, at p 632:

"... I am of opinion that nothing has been urged before us

which would induce us to hold that the authority of the

company was not given to the making of this mortgage; at

least in this sense, that an outside person, who had no

other means of knowledge, was entitled to regard the company

as having performed its functions in the making of this

mortgage by whatever means it could lawfully do so."

29. In Duck v. Tower Galvanizing Company (1901) 2 KB 314 one Restall formed his business into a limited company. He then carried on the business without reference to the other subscribers to the memorandum. There were no meetings, no resolutions and no minute books. The articles gave power to issue debentures. A debenture was executed under the seal of the company and signed by Restall and his wife purporting to act as directors. The company was held to be bound by the debenture. The judgment of the court is short and does not attempt any elaborate analysis, but it is apparent from the argument that the issue was whether Restall was held out by the company as having the powers of a managing director and thus the authority to direct the affixation of the seal. The issue of authority was determined against the company, the objections raised being held to be mere formalities which were covered by the indoor management rule.

30. In the present case, neither Robert Sturgess nor his son, Gerard Sturgess, was authorized to mortgage the land held by Northside Developments Pty. Limited. They had no actual authority and the company had not held either of them out as possessing any authority to enter into a transaction of that type on its behalf. It would seem that the company did not even hold Gerard Sturgess out as being its secretary, but it is unnecessary to determine that question because, even if it did, the office of secretary would not carry with it any apparent authority to encumber the company's land. The secretary of a company is its administrative officer and, even though his authority ordinarily extends to countersigning the affixation of the company's seal pursuant to a resolution of the board of directors, he has no apparent authority to enter into commercial transactions upon his own decision, save for transactions of an administrative kind required for the day to day running of the company's affairs: Panorama Developments v. Fidelis Fabrics (1971) 2 QB 711, at pp 716-717. Plainly the transaction in this case was not of that kind.

31. Nor does an ordinary, individual director of a company have any ostensible authority to bind the company. A managing director may have wide powers, actual or ostensible. In Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd. it was held that a person who had assumed the powers of a managing director of a property company with the company's approval had apparent authority to engage architects on the company's behalf, this being within the ordinary ambit of the authority of a managing director of a company of that kind. And even ordinary directors may have quite significant functions entrusted to them by the company, although usually these are of a more or less formal nature, such as affixing the company seal to documents which the company requires to be executed: see Lennard's Carrying Company Limited v. Asiatic Petroleum Company Limited, at p 715. But the position of director does not carry with it any ostensible authority to act on behalf of the company. Directors can act only collectively as a board and the function of an individual director is to participate in decisions of the board. In the absence of some representation made by the company, a director has no ostensible authority to bind it.

32. In this case, there is no finding that Northside Developments Pty. Limited held Robert Sturgess out as having authority to encumber its land on its behalf nor on the evidence could there be. The company in fact conducted no business which could be said to have been delegated to an individual director and, in any event, it would have been apparent that this transaction was not in the course of any business which it might have conducted. The transaction was completed without the actual or apparent authority of Northside Developments Pty. Limited and the affixation of the seal of the company was a forgery. This precluded the application of the rule in The Royal British Bank v. Turquand. It is unnecessary to consider whether, had there been ostensible authority to bind the company, the application of that rule would have resulted in a binding document.

33. Having reached that conclusion, it is also strictly unnecessary for me to consider whether Barclays was, in any event, put upon inquiry. Nevertheless, I may indicate briefly that in my view such was the case. The very nature of a transaction may put even an outsider dealing with a company upon inquiry as to the authority of persons purporting to act for it: Rolled Steel Ltd. v. British Steel Corporation (1986) Ch 246, at pp 284-285. Here the moneys involved were substantial and were lent by Barclays for purposes which had no apparent connection with any business carried on by Northside Developments Pty. Limited. Nor did the loan appear to serve any interest which Northside Developments Pty. Limited might have. Any relation between Northside Developments Pty. Limited and the companies to which the loan was made did not go beyond the fact that the companies shared the same registered office as Northside Developments Pty. Limited and also had as officers Robert Sturgess and Gerard Sturgess. But this did not provide any explanation for the transaction. Indeed, the latter circumstance rather suggested that the two Sturgesses may have stood to gain in some way by the transaction. The plain fact of the matter was that Barclays took a mortgage over the land of Northside Developments Pty. Limited as security for the indebtedness of companies with which the Sturgesses, father and son, were connected and with which Northside Developments Pty. Limited was not relevantly connected. It was the case of a director attempting to have a company apply its property for the benefit of other companies in which he had an interest: cf. E.B.M. Co. Ltd. v. Dominion Bank (1937) 3 All ER 555, at p 569. In my view, these circumstances were sufficient to put Barclays upon inquiry to ascertain whether the seal of Northside Developments Pty. Limited was properly affixed to the mortgage. There was no evidence that Barclays made any inquiry and the consequence is that no reliance could be placed upon the rule in The Royal British Bank v. Turquand, even if it were otherwise applicable.

34. The Registrar-General also made submissions based upon s.51A(1) of the Conveyancing Act 1919 (N.S.W.) and s.106 of the Real Property Act. I agree with the Chief Justice, for the reasons given by him, that those submissions must fail.

TOOHEY J. I would allow this appeal, for the reasons developed by Dawson J. in his judgment. What follows is not intended in any way to detract from my agreement with those reasons; it aims to do little more than place the rule in The Royal British Bank v. Turquand (1856) 6 El. and Bl. 327 [1856] EngR 470; (119 ER 886) in context.

2. The scope of the rule is identified by its other title, the "indoor management" rule, a description used by Lord Hatherley in Mahony v. East Holyford Mining Co. (1875) LR 7 HL 869, at p 894. In its early history, the rule may be seen as relieving those who dealt with companies of the obligation to ensure that there had been no irregularities in the internal management of the company in relation to such matters as the holding of meetings and the passing of resolutions. This might include elections and appointments to office, the presence of a quorum at meetings and the execution of documents. In such cases, "if nothing has occurred which is evidently contrary to the provisions of the registered documents, the outsider may assume the regularity of all matters internal to the company and its organisation": Sealy, Cases and Materials in Company Law, 2nd ed. (1978), p 209.

3. That, I think, is still the proper scope of the rule and it was so seen by Lord Simonds in Morris v. Kanssen (1946) AC 459, when he said, at p 474:

"The so-called rule in Turquand's case is, I think,

correctly stated in Halsbury's Laws of England, 2nd ed.,

vol. V, at p 423: 'But persons contracting with a company

and dealing in good faith may assume that acts within

its constitution and powers have been properly and duly

performed and are not bound to inquire whether acts of

internal management have been regular.'"

This formulation of the rule, with some slight variation in language, appears in Halsbury's Laws of England, 4th ed., vol.7(1), (1988), par.980.

4. But where the question is whether an officer of the company has authority to bind the company by his actions, the context moves from one of indoor management to one of agency and the ordinary rules of agency then come into play. The indoor management rule is in effect a concession to the outsider in dealing with a company; it does not confer authority on an officer of the company to enter into a contract where that authority does not otherwise exist. Authority must actually exist to enter into the transaction in question or it must be found in principles of agency, as in the concept of ostensible authority. This place for the operation of agency principles in the affairs of companies was made clear by Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd. (1964) 2 QB 480, a decision which was applied by this Court in Crabtree-Vickers Pty. Ltd. v. Australian Direct Mail Advertising and Addressing Co. Pty. Ltd. [1975] HCA 49; (1975) 133 CLR 72.

5. I agree with the distinction drawn by Dawson J. between forgery which involves a counterfeit signature or seal and that which does not, and the consequences flowing from that distinction. The former is in truth a nullity, to which the indoor management rule does not speak. The latter, to which the term "forgery" is only loosely applied although it is used in some of the cases (Kreditbank Cassel G.m.b.H. v. Schenkers (1927) 1 KB 826 and South London Greyhound Racecourses Ltd. v. Wake (1931) 1 Ch 496 for example), turns upon the authority of those who purport to act on behalf of the company, an authority which may be inferred if the company holds out the person as authorized to act on its behalf or allows him to act as if he were so authorized. Where a person affixes the seal of a company to a document, without actual authority to do so, the consequences for the company will depend on its own conduct in relation to that person - what it has held that person as having authority to do or what it has allowed him to do without demur. In a particular case, the consequences might well be the same if the indoor management rule were applied, but it is the principles of agency which operate in this area. The application of those principles to the present case leads to the conclusion that there was nothing in the conduct of the appellant which would hold it to the actions of Robert Sturgess in mortgaging its land.

6. While, on the approach taken by Dawson J., it is unnecessary to determine whether Barclays Credit Corporation Holdings Pty. Limited ("Barclays") was put upon inquiry, I agree that Barclays was, in the circumstances of this transaction, put upon inquiry. But the evidence did not disclose that it made any. Indeed, it should be noted that at the trial Mr Clare, a former manager of one of the Barclays' companies, gave evidence that no enquiries had been made by Barclays into the nature and extent of Mr Sturgess' interest in the land at Frenchs Forest, beyond what he was told by Sturgess. Likewise, Mr Duncan, the former assistant general manager of Barclays Australia (Finance) Limited, admitted that he probably had made no enquiries of Mr Sturgess or anyone else to ascertain what was Sturgess' relationship with the appellant.

7. In the circumstances the appellant was not bound by the mortgage to Barclays.

GAUDRON J. The appellant, Northside Developments Pty. Limited ("Northside"), seeks to establish liability on the part of the Registrar-General pursuant to s.127 of the Real Property Act 1900 (N.S.W.) ("the Act") in respect of the registration of a mortgage in favour of Barclays Credit Corporation Holdings Pty. Limited ("Barclays") over land of which Northside was then the registered proprietor. The land was subsequently sold by Barclays as mortgagee in possession. The facts are set out in the judgment of Mason C.J. and, save to the extent that they are later specifically adverted to, they need not be repeated.

2. Section 127(1) of the Act relevantly provides:

"Any person sustaining loss or damages ... by the

registration otherwise than under section 45E of any other

person as proprietor of land ..., and who by the provisions

of this Act is barred from bringing proceedings ... for

possession of that land, or other proceedings or action for

the recovery of such land, estate, or interest or to whose

claim every such proceedings or action would be inapplicable

may, in any case in which the remedy by action for recovery

of damages as hereinbefore provided is inapplicable, bring

an action against the Registrar-General as nominal defendant

for recovery of damages."

3. The issue in the present case is whether the loss or damage suffered by Northside was sustained by registration or by execution of the mortgage. It is common ground that, if the loss or damage was sustained by registration, the further requirements of s.127 of the Act are satisfied.

4. As appears from the judgment of Mason C.J. the mortgage was not authorized by Northside. Its execution was effected by the affixation of Northside's seal and by signing by Mr Robert Sturgess, a director, and by Mr Gerard Sturgess who, although not appointed as secretary, was shown in the records of the Corporate Affairs Commission as appointed to that office. To an outsider possessed only of the information contained in the memorandum and articles of association and the returns filed with the Corporate Affairs Commission the affixation of the seal would appear to conform with the requirements of the articles relating to its use. And there is no suggestion but that the transaction was of a type that Northside was empowered to undertake.

5. The mortgage was part of a transaction by which Mr Robert Sturgess financed a business enterprise conducted by Farola Pty. Limited ("Farola"). Neither Northside nor any of its directors or shareholders, other than Mr Robert Sturgess, had any interest in or was otherwise associated with Farola. Nor were they aware of the transaction. The moneys secured by the transaction were advanced to Farola or at its direction. The execution of the mortgage was, quite simply, a fraud on Northside.

6. The question whether the loss suffered by Northside was sustained by registration or by execution of the mortgage depends upon whether the mortgage was, on execution in the manner described, binding on it. If not, the loss was sustained by registration which vested an indefeasible title in Barclays, Barclays not having been party to the fraud.

7. It was argued that Northside became bound by the mortgage by operation of the rule in The Royal British Bank v. Turquand (1856) 6 El. and Bl. 327 (119 ER 886). The rule derives from a statement by Jervis C.J. (at p 332 (p 888 of ER)) in these terms:

"We may now take for granted that the dealings with these

companies are not like dealings with other partnerships, and

that the parties dealing with them are bound to read the

statute and the deed of settlement. But they are not bound

to do more. And the party here, on reading the deed of

settlement, would find, not a prohibition from borrowing,

but a permission to do so on certain conditions. Finding

that the authority might be made complete by a resolution,

he would have a right to infer the fact of a resolution

authorizing that which on the face of the document appeared

to be legitimately done." (Emphasis added)

The final sentence of this passage suggests that the rule was grounded in notions akin to those which underlie estoppel, but no passage in the relatively brief judgment expressly so states. Nor is the legal foundation of the rule made explicit in subsequent cases, such as Mahony v. East Holyford Mining Co. (1875) LR 7 HL 869, County of Gloucester Bank v. Rudry Merthyr Steam and House Coal Colliery Company (1895) 1 Ch 629 and Duck v. Tower Galvanizing Company (1901) 2 KB 314, in which the rule was considered and applied.

8. Recently, particularly since the decision in Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd. (1964) 2 QB 480, there has been debate as to whether the rule in Turquand's Case is a special rule of company law based upon considerations relating to the use of the company seal or is an illustration of what are said to be agency principles underlying the notion of "apparent" or "ostensible" authority. See, for example, Lindgren, "History of the Rule in Royal British Bank v. Turquand", [1975] MonashULawRw 14; (1975) 2 Monash University Law Review 13 and "The Positive Corporate Seal Rule and Exceptions Thereto and the Rule in Turquand's Case", [1973] MelbULawRw 18; (1973) 9 Melbourne University Law Review 192, where it is argued that the rule is a manifestation of what is referred to as "the positive corporate seal rule". See, too, Bowstead on Agency, 15th ed. (1985), at pp 293-297, where the rule is dealt with as an aspect of "apparent" or "ostensible" authority and Gower's Principles of Modern Company Law, 4th ed. (1979), at pp 203-204, where the rule is said to have "always been expressed as an agency principle". It has also been suggested that the rule is an application of the maxim omnia praesumuntur rite esse acta. See Morris v. Kanssen (1946) AC 459, at p 475.

9. The debate as to the legal foundation of the rule in Turquand's Case bears on the present case in so far as the parties sought to argue by reference to its supposed foundation the question of its application or non-application to a transaction involving the fraudulent affixation of a company seal. In this respect it was argued on behalf of the Registrar-General that the rule, being a special rule of company law, renders binding an instrument to which a company's seal has been affixed and which has been signed by persons apparently authorized to so sign (the seal and signatures being genuine), notwithstanding that the transaction is a fraud on the company. Cases supporting the proposition that the rule in Turquand's Case has no application to fraudulent transactions said to be or to be the same as forgeries, such as Ruben v. Great Fingall Consolidated (1904) 2 KB 712, at pp 729-730, (1906) AC 439, at p 444, Kreditbank Cassel G.m.b.H. v. Schenkers (1927) 1 KB 826 and South London Greyhound Racecourses Ltd. v. Wake (1931) 1 Ch 496, were said to be based on the misconception that the rule is grounded in agency principles. On the other hand, it was argued on behalf of Northside that the fraudulent affixation of a seal amounts to a forgery to which the rule has no application, a forgery being binding only by operation of an estoppel. It was further argued that, in the circumstances of the present case, such an estoppel could only arise if Robert and Gerard Sturgess had "apparent" or "ostensible" authority to bind Northside in the transaction with Barclays. Additionally, it was argued on behalf of Northside that the rule did not apply in the present case because: (a) Mr Gerard Sturgess was not, in fact, a person in whose presence the seal might properly be affixed, and (b) the circumstances attending the transaction were such as ought to have put Barclays to further inquiry.

10. Merely identifying the rule in Turquand's Case as a special rule of company law or as an illustration of agency principles provides no sure guide to its application in any particular case. Moreover, in so far as the arguments of the parties made reference to the doctrine of "apparent" or "ostensible" authority, it is pertinent to note that the latter is no more than a familiar example of an estoppel which operates within the framework of agency principles. So much may be seen from the decision of Diplock L.J. in Freeman and Lockyer (at p 503) where "apparent" or "ostensible" authority was identified as a legal relationship between the principal and the contractor created by a representation which, "when acted upon by the contractor ..., operates as an estoppel, preventing the principal from asserting that he is not bound by the contract".

11. One aspect of the rule - and one upon which Northside relies - is not in issue, namely, that it does not apply to validate a transaction if a person dealing with a company has notice of facts which ought put him or her to further inquiry. See AL Underwood Ltd. v. Bank of Liverpool (1924) 1 KB 775; Morris v. Kanssen, at p 475; Rolled Steel Ltd. v. British Steel Corporation (1986) Ch 246, at pp 284-285. That aspect suggests that, like the doctrine of "apparent" or "ostensible" authority, the rule in Turquand's Case may have its genesis in estoppel or in notions very similar to those that underlie that doctrine. The gist of an estoppel is "an assumption adopted by (a person) as the basis of some act or omission which, unless the assumption be adhered to, would operate to (that person's) detriment": Thompson v. Palmer [1933] HCA 61; (1933) 49 CLR 507, per Dixon J. at p 547. See also Grundt v. Great Boulder Pty. Gold Mines Ltd. [1937] HCA 58; (1937) 59 CLR 641, per Dixon J. at p 675; Waltons Stores (Interstate) Ltd. v. Maher [1988] HCA 7; (1988) 164 CLR 387, at pp 404, 413-414, 458; Foran v. Wight [1989] HCA 51; (1989) 64 ALJR 1, at p 12; [1989] HCA 51; 88 ALR 413, at p 431. Whether or not a person will be allowed to depart from such an assumption depends upon the part played in the adoption of it by the other. See Grundt, at p 675. If the latter has knowledge of facts or ought to have knowledge of facts putting him or her to further inquiry, that is a matter which tells against the former having played such a part in the adoption of the assumption that he or she should be held to it.

12. It appears to have been recognized from very early times that an estoppel may operate by reference to the fraudulent affixation of a seal (whether that of an individual or a corporation), although the question of liability on a fraudulently sealed instrument may not always have been expressed precisely in terms relevant to estoppel. Certainly it was so expressed in Bank of Ireland v. Evans' Trustees [1855] EngR 714; (1855) 5 HLC 389, at pp 409-410 [1855] EngR 714; (10 ER 950, at p 959), where Parke B. expressed the test whether trustees who had been incorporated by statute were bound by instruments to which the corporate seal had been fraudulently affixed as being whether the "supposed negligent custody" of the seal was "of that species of negligence which alone would warrant a jury in finding that the Plaintiffs were disentitled to insist on the transfer being void". See also Mayor, Etc., of Merchants of the Staple of England v. Governor and Company of Bank of England (1887) 21 QBD 160, at pp 172, 174-175 and 176.

13. The concluding words from the passage above cited from Turquand's Case, the non-application of the rule if circumstances exist warranting further inquiry, and the significance of estoppel in relation to the use of a seal (expressly recognized in Bank of Ireland the year before Turquand's Case was decided in the Exchequer Chamber) combine to suggest that the rule in Turquand's Case ought now to be seen as grounded in notions akin to those which underpin the law of estoppel. When the rule is approached from that perspective, the affixation of the seal is readily seen as being taken to have given rise to an assumption which was acted upon by acceptance of the instrument to which the seal was affixed and which, clearly enough, would result in detriment if adherence to the assumption were not compelled. On this basis, there are two critical considerations in determining whether the rule operates so as to render a company bound by a transaction involving the fraudulent affixation of its seal. The first is the identification of the underlying assumption taken to have been made by reason of the affixation of the seal. The second is the identification of those circumstances which would indicate that the part, if any, played by the company was not such as would require it to be held to the assumption or, more precisely, will be taken as sufficient reason for not holding the company to the assumption taken to have been made.

14. The conclusion in Turquand's Case rested on the entitlement of the plaintiffs to infer "a resolution authorizing that which on the face of the document appeared to be legitimately done". Turquand's Case was decided on demurrer and it is therefore necessary to have regard to the pleadings upon which it was decided. The plaintiffs had declared that "the Company, ... by their writing obligatory, sealed with their common seal, acknowledged themselves to be held and firmly bound to the plaintiffs". In answer to that declaration it was pleaded by way of averment, inter alia, that "no resolution of any general meeting of the ... Company was at any time passed authorizing the making of the ... writing obligatory; and that the same was given and made without the authority or consent of the shareholders of the ... Company". See The Royal British Bank v. Turquand (1855) 5 El. and Bl. 248 [1855] EngR 531; (119 ER 474). To that plea the plaintiffs demurred. The decision on demurrer was strictly no more than that lack of authority by reason of non-compliance with procedural preconditions was no answer to the plaintiffs' contention that the company had bound itself by the instrument to which its seal was affixed. However, it being no answer, it necessarily follows that the affixation of a company's seal to an instrument is taken to give rise to an assumption that the company has bound itself to the transaction therein embodied.

15. The matters providing sufficient answer to an assertion that a company has bound itself by virtue of the affixation of its seal to an instrument which embodies a transaction are, to some extent, made explicit in Turquand's Case. The judgment of Jervis C.J. allows that an absolute prohibition on the transaction, which prohibition might be ascertained from the public documents of the company, is sufficient answer. And at first instance Lord Campbell C.J. (5 El. and Bl. 248, at pp 260-261 (p 479 of ER)) suggested that an assertion that the company was bound might be answered by a plea of non est factum or by showing that the transaction was unlawful and void, his Lordship adding that illegality would be shown "(i)f the directors had exceeded their authority to the prejudice of the shareholders ... and this had been known to the obligees".

16. It needs to be borne in mind that ordinarily the delivery of an instrument bearing a company's seal is the culmination of a transaction which will have been preceded by negotiations and dealings conducted by the company's directors or agents. Clearly enough, if those directors or agents, in their negotiations and dealings on behalf of the company, fail to advert to an outstanding requirement that a condition precedent be satisfied before the transaction is brought to completion, they thereby encourage an assumption that, when the company's seal is affixed to the instrument in question, the company is thereby bound. And, because they are acting on behalf of the company, the company has also encouraged that assumption. But the position is not the same when a director or agent is transacting business in fraud upon the company. In such a case the director or agent is not acting on behalf of the company and, ex hypothesi, the company has not itself done anything to foster any assumption, unless some additional factor can be identified as bearing on the transaction or the affixation of the seal. Some additional factor, such as the adoption of the transaction or some act or omission founding an assumption that the director or agent was acting on behalf of the company, might well emerge. But in that event the issue becomes one of estoppel proper rather than the application of the rule in Turquand's Case. Accordingly, in my view, a company may answer an assertion that it has bound itself to a transaction embodied in an instrument to which its seal is affixed by establishing that the seal was fraudulently affixed, or, in other words, that the transaction was not entered on behalf of the company but with intent to defraud. Of course, it follows from what has been said earlier that that answer will not avail if the company is otherwise estopped from denying that the transaction was entered on its behalf.

17. In the present case both parties approached the question whether Northside was otherwise estopped in relation to the transaction with Barclays on the basis of "apparent" or "ostensible" authority. On behalf of the Registrar-General, it was argued that such authority could be found in the manner in which Northside had allowed its affairs to be controlled by Mr Robert Sturgess and his firm of accountants; on behalf of Northside, it was argued that it was necessary to find "apparent" or "ostensible" authority to enter into the impugned transaction. Although there will often be a coincidence of "apparent" or "ostensible" authority and an estoppel binding a company to a transaction involving the fraudulent affixation of its seal, the question of estoppel in relation to the transaction is, in essence, separate from that of "apparent" or "ostensible" authority. In a case involving forgery or the fraudulent affixation of a company's seal it may be taken that an assumption has been made by the person accepting the forged or fraudulent instrument that the transaction in question is the transaction of the company and that detriment will be sustained if adherence to that assumption is not compelled. The critical question is whether the company has played such a part in the adoption of that assumption that it should be held to it. See Grundt, at p 675; Waltons Stores, per Mason C.J. and Wilson J. at p 404. The company may have played such a part in the adoption of that assumption by refraining from correcting a mistake that the other was known to be labouring under; by acting imprudently, when care was required, which imprudence was a proximate cause of the other party's adopting and acting on the faith of the assumption; or by making a representation which founded the assumption. See Thompson, at p 547. See also Grundt, at p 676; Waltons Stores, at pp 444, 461.

18. The arguments made by reference to "ostensible" or "apparent" authority were not expressly limited to the situation in which such authority derives from a representation, whether made expressly or by conduct. And, the argument on behalf of the Registrar-General, made by reference to the manner in which the company was allowed to be controlled, exhibits certain features of estoppel by imprudence. The fundamental difference between the arguments was as to the required degree of proximity between the conduct said to give rise to the "ostensible" or "apparent" authority and the transaction itself.

19. In Bank of Ireland and in Mayor, Etc., of Merchants of the Staple it was held that imprudence (or negligence) would give rise to an estoppel in relation to a transaction embodied in an instrument to which a corporation's seal had been fraudulently affixed only if there was negligence in relation to the impugned transaction itself. Although imprudence must be "a proximate cause" of the adoption of an assumption as the basis of action or inaction, it is questionable whether the requirement of proximity is satisfied only by imprudence or negligence in the transaction itself, particularly in cases involving the fraudulent affixation of a seal. If, in terms used by Wills J. at first instance in Mayor, Etc., of Merchants of the Staple (at p 169), "the mode of keeping the seal was ... calculated to facilitate, if not to invite, the commission of forgery", it is difficult to see that that is not a proximate cause of the adoption of an assumption that, the seal having been affixed to an instrument, the transaction therein embodied is that of the company. After all, again in terms used by Wills J., in that situation all that remains "for a dishonest man to do (is) the physical act of affixing the seal, which is a much easier operation than that of imitating handwriting". And the same observations appear to have equal force if the company is controlled in a manner calculated to invite the commission of fraud. However, this matter was not fully explored in argument and is not a matter that needs to be determined in the present case.

20. As earlier pointed out, the existence of facts which ought to put a person to further inquiry will tell against another having so contributed to the adoption of an assumption that adherence to the assumption should be compelled. In the present case the transaction with Barclays was, on its face, a transaction for the benefit, not of Northside, but of Farola. Were the rule in Turquand's Case otherwise applicable, the fact that the transaction was for the benefit of Farola and not for the benefit of Northside ought to have put Barclays upon further inquiry for the reasons given by Mason C.J. In the circumstances of this case, there being no representation (actual or otherwise) by Northside as to the authority of Robert or Gerard Sturgess and no basis for any assumption that Farola was associated with Northside, that fact is also sufficient answer to any argument that Northside was otherwise bound, by the operation of an estoppel, by the transaction embodied in the mortgage instrument to which its seal was fraudently affixed. Accordingly, Northside sustained loss by registration of the mortgage and not by its execution. For the reasons given by Mason C.J. the liability of the Registrar-General under s.127 of the Act is not in any way affected by s.51A(1) of the Conveyancing Act 1919 (N.S.W.) or by s.106 of the Act.

21. It is unnecessary to deal with the argument made on behalf of Northside that because Gerard Sturgess had not in fact been appointed secretary it was not bound by the mortgage, whether by operation of the rule in Turquand's Case or otherwise. However, I would wish to observe that, in my view, a return filed with the Corporate Affairs Commission will ground an assumption as to the truth of the matters therein stated, and, if a company allows its affairs to be so conducted that inaccurate returns are filed, it thereby so contributes to that assumption that it is estopped from asserting otherwise.

22. The appeal should be allowed. The orders of the Court of Appeal of the Supreme Court of New South Wales should be set aside and in lieu thereof it should be ordered that the appeal to that court be dismissed with costs.

Set aside the orders of the Court of Appeal in so far as they apply to the appellant and in lieu thereof order that the appeal to that Court against the orders of Young J. in favour of the appellant be dismissed with costs.

The first respondent to pay the appellant's costs of the appeal.