4 February 2008 by

The Turquand Rule – a question of authority

Serious consequences can result when a person representing a company does not have the necessary authority.

The question of authority came under scrutiny in a decision recently handed down in the Cape High Court: BLRT Investments v Grand Parade Investments Ltd and others 2007 JOL 19779 (C).

After considering a draft voting pool agreement, the directors of BLRT signed a round robin resolution approving the agreement and authorising one of their number to sign it on BLRT's behalf. But at the time of signing the final l agreement, so many changes had been made to the agreement that its terms were substantially different from those contained in the draft agreement the directors had originally resolved to sign. .

BLRT subsequently disputed that the director had had the requisite authority to sign the final agreement on its behalf, asserted that it was not bound by the terms of such agreement, and attempted to take action contrary to the terms of the voting pool agreement.

Having been interdicted from taking such action, BLRT brought an application for an order that it was not bound by the voting pool agreement. One of the parties to the voting pool agreement challenged the application, principally on the basis of the Turquand rule, which can in appropriate circumstances be relied on when the authority of a company's representative is questioned.

The Turquand rule states that "Persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly performed, and are not bound to enquire whether acts of internal management have been regular."

However, as the court in this case confirmed, there are circumstances under which a company would not be bound by the Turquand rule. These circumstances include where a person knows that the official acting on behalf of the company was acting beyond his actual authority; and if the circumstances are such as to put him on enquiry. In this case, BLRT was able to show that on the day of signing the voting pool agreement, its representative had questioned whether he had the requisite authority and that a director of the respondent had (wrongly) assured him that he had that authority as a result of the round robin resolution. The respondent could not rely on the Turquand rule when its director was aware that BLRT's representative might have been acting beyond his authority and should have been put on enquiry.

Some important points arising from this case should be borne in mind:

  1. Resolutions approving the entering into of a particular agreement are generally passed before an agreement is drafted or when it is still in draft form. To avoid later problems, one needs to ensure that the final agreement contains terms which the board of the company has approved before the agreement is signed. .
  2. Company members should raise irregularities at the meeting so that they can be can be put right at the meeting itself. Failure to do so may be construed as a waiver of the member’s right to object to the irregularity.

An important point that was clarified is how, in terms of section 199 of the Companies Act, the three quarters majority required to pass a special resolution is made up. Is the three quarters majority calculated with reference to the votes cast for and against the resolution? Or is the majority of three quarters calculated with reference to the number of votes of all those present and entitled to vote at the meeting? The court clarified that the latter was the correct approach and that the number of potential votes of members present at the meeting but who do not vote, would count against the resolution when calculating the three quarters majority.

The case illustrates that there are certain areas of company law which continue to challenge us and whose importance should not be underestimated.

Verushca Pillay and Nikosha Reggie

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