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