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Case Update: Rule in Turquand's case

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COMPANY LAW
Directors – Authority – Rule in Turquand case – Whether the rule in Turquand’s case applies to an outsider who have constructive notice of the identity of directors and managers of a company as per Form 49 – Whether an outsider could rely on the rule in Turquand’s case and the principles of ostensible authority of a person to bind a company where the ‘holding out’ or representation of authority was made by person with no authority
 
Kang Hai Holdings Sdn Bhd & Anor v Lee Lai Ban
[2018] 2 CLJ 550, Federal Court
 
Facts The appellants, Kang Hai Holdings (“KHH”) and Kang Hai Realty Sdn Bhd (“KHR”) are the owners of three lands (“the Lands”). The first defendant at the High Court (Siva) was a former director of KHH and KHR. Despite having ceased to be a director of KHH, Siva proceeded to engage the respondent, Lee Lai Ban (“Lee”), to extract earth from the Lands. Siva and Lee entered into a tenancy agreement over the lands whereby Lee was to extract and purchase earth. Lee then met with a director of KHH and KHR who informed Lee that Siva was never authorised to transact on the company’s behalf. However, Lee continued to extract earth from the Lands. The respondent claimed that, (i) Siva had fraudulently held himself out as a director and manager of KHH and forged a letter which purported to engage Lee to extract and purchase red earth and rock materials from the Lands; (ii) that Lee had known at all material times that Siva was not an authorised representative of the appellants; and (iii) that Siva had received monies from Lee as payment for the extraction which were below market value. Siva however claimed that he was a director of KHH, and had acted with authority. Lee on the other hand claimed that he relied on Siva’s representations and that the extraction was lawful, and counter-claimed for loss of profits for breach of letter and tenancy agreement. The High Court allowed the appellants’ claim against Siva and Lee. The Court of Appeal allowed Lee’s appeal holding that Lee was entitled to invoke protection under the rule in Turquand’s case (“the Rule”), whilst Siva’s appeal was dismissed. Hence, this appeal.
 
Issues The issues were (i) whether the Rule applies where an outsider dealing with the company is deemed to have constructive notice of the identity of the directors and managers of a company as shown in Form 49; and (ii) whether an outsider could rely on the Rule and the principles of ostensible authority of a person to bind a company where the ‘holding out’ or representation of authority was made solely by the person with no authority.
 
Held It was held that the law imposes a minimum duty on the outsider to, at the very least, make a minimum check to afford the outsider the protection of the Rule. As such, the Rule does not apply as Lee did not make any searches which clearly reveal that Siva was not a director nor a managing director of KHH and KHR, and that Lee is deemed to have constructive knowledge of, by reputation or otherwise, Siva was. Further, Lee’s pleadings clearly showed the representation of authority relied on were made by Siva to Lee and that Siva was the managing director and director of both KKH and KKR at the time of the contract but Lee had constructive knowledge that Siva was not. As Siva had no authority, actual or ostensible, to act for KKH and KKR, Lee could not plead the Rule.