Understanding the Indoor Management Rule

The Indoor Management Rule is set out (although not by name in the CBCA) in sections (18) of the Canada Business Corporations Act (“CBCA”) and (19) of the Ontario Business Corporations Act (“OBCA”).

Section 18 of the CBCA states,

  • 18 (1) No corporation and no guarantor of an obligation of a corporation may assert against a person dealing with the corporation or against a person who acquired rights from the corporation that

  • (a) the articles, by-laws and any unanimous shareholder agreement have not been complied with;

  • (b) the persons named in the most recent notice sent to the Director under section 106 or 113 are not the directors of the corporation;

  • (c) the place named in the most recent notice sent to the Director under section 19 is not the registered office of the corporation;

  • (d) a person held out by a corporation as a director, officer, agent or mandatary of the corporation has not been duly appointed or has no authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for a director, officer, agent or mandatary;

  • (e) a document issued by any director, officer, agent or mandatary of a corporation with actual or usual authority to issue the document is not valid or genuine; or

  • (f) a sale, lease or exchange of property referred to in subsection 189(3) was not authorized.

Section 19 of the OBCA states,

  • 19 A corporation or a guarantor of an obligation of a corporation may not assert against a person dealing with the corporation or with any person who has acquired rights from the corporation that,

  • (a) the articles, by-laws or any unanimous shareholder agreement have not been complied with;

  • (b) the persons named in the most recent notice filed under the Corporations Information Act, or named in the articles, whichever is more current, are not the directors of the corporation;

  • (c) the location named in the most recent notice filed under the Corporations Information Act or named in the articles, whichever is more current, is not the registered office of the corporation;

  • (d) a person held out by a corporation as a director, an officer or an agent of the corporation has not been duly appointed or does not have authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for such director, officer or agent;

  • (e) a document issued by any director, officer or agent of a corporation with actual or usual authority to issue the document is not valid or not genuine; or

  • (f) a sale, lease or exchange of property referred to in subsection 184 (3) was not authorized,

Practically, the Indoor Management Rule means that any persons having dealings with a corporation are entitled to rely on the representation or belief that an individual held out to be an officer or director is in fact an officer or director, notwithstanding that the individual may have been improperly elected or whom do not, in fact, hold that office by virtue of some clerical, formal or legal error. Effectively, if a corporation is holding an individual out as being an officer or director, third parties are entitled to rely on same for the purposes described in sections 18 and 19 above, i.e. that the individual actually has the authority to do what an officer or director, properly elected, would ordinarily have the authority to do.