The Indoor Management Rule And Security Grant In A Signed Purchase Order Upheld

A question that we are often asked as finance lawyers is what level of support is needed to confirm that a document was properly executed, such that it would be binding on, and enforceable against, the corporate signatory. Our general advice is to obtain a certificate of incumbency, together with an authorizing resolution, and in many cases a legal opinion, from the signatory's legal counsel. However, depending on the nature of the transaction, many of our clients (borrower and lender clients alike) have stated that it is not feasible to obtain these documents given the size of the transaction or other circumstances. In these circumstances, we suggest to our client that they may be able to rely on the "indoor management rule," a longstanding legal principle that counterparties transacting with companies may assume that internal company policies are complied with and that the documents and contracts signed by a signatory on behalf of a corporation are enforceable in accordance with their terms.

While the so called "indoor management rule" is codified in Section 19 of the Business Corporations Act (Ontario) and Section 18 of the Canada Business Corporations Act, the legal roots of the rule can be traced back to ancient English common law as early as the 19th century. The recent case of Accra Wood Productions Ltd. (Bankruptcy of), 2014 BCSC 1259 ("Accra") is welcome news to funders for two separate and distinct reasons. First, the case adds modern support to the ancient rule that reliance can be placed on the indoor management rule. Second, this case considers whether security language embedded in a purchase order will be upheld. It is not uncommon practice for suppliers of goods (whether structured as conditional sales or otherwise) to include security granting language over the goods supplied in a signed purchase order. There has always been a concern that this type of grant of a security interest may not be upheld as it was not the intention of the buyer to confer a security interest on its vendor. As will be discussed in greater detail below, if the language is clear and obvious, a Court will uphold the grant of the security.

A critical issue in Accra was whether a supplier of...