KANG HAI HOLDING SDN BHD & ANOR V LEE LAI BAN
CIVIL APPEAL NO: 02(f)-65-09-2016 (J)
Coram:
ZULKEFLI AHMAD MAKINUDIN PCA
RICHARD MALANJUM CJ (SABAH & SARAWAK)
ABU SAMAH NORDIN FCJ
ZAHARAH IBRAHIM FCJ
PRASAD SANDOSHAM ABRAHAM FCJ
Directors – Authority – Tenancy agreement – Whether former director had ostensible authority to enter into tenancy agreement on behalf of company – Whether tenant ‘outsider’ dealing with company – Whether deemed to have constructive notice of identity of directors and managers of company – Whether rule in Turquand’s case applies – Whether ‘outsider’ should have made searches on status of directors of company – Whether ‘outsider’ imputed with particulars of Form 49 – Whether failure to make searches denied outsider protection of rule in Turquand’s case
The Federal Court in this case explained whether an outsider who entered into an agreement with a former director is protected under the rule of Turquand.
What is the Turquand’s rule (Indoor management rule)?
In brief, this rule provides protection to persons dealing with a company in good faith. An outsider dealing with a company does not need to enquire into the regularity of the internal affairs and proceedings of the company, and may assume that all is being done regularly[1]
BRIEF FACTS
The 1st Appellant, Kang Hai Holdings Sdn Bhd (“KHH”) and the 2nd Appellant, Kang Hai Realty Sdn Bhd (“KHR”) were the owners of lot 2929 and lot 2980 respectively.
The 1st Defendant at the High Court, Sivanantham a/l Muthukarpan (“Siva”) who was the former director of KHH at the material time held himself out as the general manager and the director of KHH and KHR.
Despite ceasing to be a director of KHH, Siva continued to transact on behalf of the company and appointed the Respondent, Lee Lai Ban (“Lee”) to extract and sell red earth from lot 2929 and lot 2980 via a letter issued under KHH’s letterhead. Siva and Lee entered into a tenancy agreement for a period of 3 years.
KHH thereafter informed Lee that Siva had ceased to be the director and wass not authorised to transact on behalf of the company. However, Lee disregarded and continued to extract earths from the lots. Hence, the suit at the High Court against Siva and Lee for accounts and damages for fraud, forgery and trespass to land and conversion.
The High Court allowed the Plaintiff’s claim and held that Siva did not have apparent or ostensible authority, and was not authorised to transact on behalf of the company. Both the letters and tenancy agreement were held to be invalid.
The Court of Appeal affirmed the learned High Court Judge’s decision on Siva but overturned the decision on Lee. The Court held that Lee was entitled to invoke the rule in Turquand’s case.
FINDINGS OF THE FEDERAL COURT
The Federal Court held that in order to rely on the rule in Turquand’s case, the law imposes a minimum duty on Lee, at the very least to make the necessary searches. In the event Lee had made any land or company searches, it would have verified Siva’s position or authority in the company.
The Federal Court also added that the doctrine of constructive notice applied to Form 49[2].
Further, the rule in Turquand’s case does not apply where the representation of authority is made solely by the person with no authority.
Hence, Lee is not entitled to invoke the protection under the rule in Turquand’s case as his conduct fell short of what is required under the rule.
CONCLUSION
This case is noteworthy as it gives further guidance on this well-known principle of Turquand’s rule and the Federal Court had clearly set out that the conduct of the party relying on the rule is vital. From the judgment, the Federal Court held that this rule in Turquand’s case is for those who are entitled to assume for they could not have known, and not for those who willfully shut their eyes, taking advantage of this rule.
An outsider has a minimum duty to make the necessary searches (i.e. SSM search, land search, etc) for they are public documents to which the doctrine of constructive notice applies. In the words of Lord Simonds in Morris v Kansen, “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”.
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[1] K Sivapragasam a/l Krishnar v Renominium Development Sdn Bhd & Ors [1998] 4 MLJ 535
[2] Form 49 is a statement containing particulars of directors, managers and secretaries of the company. Change of particulars are also made in Form 49.
