Indoor Management Rule – Who Has Authority?

The "Indoor Management Rule" is well established in Canadian law. This common law rule holds that parties dealing with a corporation, acting in good faith and without knowledge of any irregularity, are entitled to assume that a corporation's internal policies and proceedings have been followed and complied with. Some elements of the rule are codified in the various provincial business corporations statutes.

In Accra Wood Products,1 the trustee in bankruptcy (Trustee) used the Indoor Management Rule as the basis for disallowing the secured claim made by Formations Inc. (Formations) in the bankruptcy proposal process of Accra Wood Product Ltd. (Accra). Formations had supplied raw wood materials to Accra for use in Accra's wood moulding manufacturing business. Their arrangements were documented in a credit application which Formations had provided to Accra, which application included a clause granting a security interest to Formations. That security interest covered all of Accra's present and after-acquired personal property. The credit application was completed and signed by Accra's office manager, Lisa Golding. After the execution of the credit application, the parties operated under the contract for two years without there being any hint of a problem with the granting of that security interest to Formations.2

The Trustee disallowed Formations' secured claim on two grounds: (1) Golding, as the Office Manager of Accra, did not have the authority to execute the credit application granting Formations a security interest over Accra's property and Formations knew or ought to have known that she did not have such authorization; and (2) the term of the credit application was inconspicuously included in the fine print and was not drawn to the attention of the person signing. The Trustee further argued that (a) it is not typical for a supply credit application to contain a clause granting the supplier a security interest, (b) it is not typical for an "office manager" or "accounts payable contact" to have the authority to grant such a security interest, and (c) in lending practice it is standard to obtain directors' resolutions from a company when obtaining a security interest to ensure that the security interest has been duly authorized and granted.3 In support of the Trustee, Accra contended that it had no intention of granting Formations a security interest.4

In considering Formations' appeal, Justice Masuhara of the British Columbia Supreme Court...