Doctrine of Indoor Management

Meaning of Doctrine of Indoor Management

The doctrine of Indoor Management also referred to as the Turquand’s Rule evolved 150 years back. This Doctrine came into play as an opposition to the Doctrine of Constructive Notice. On one hand, where Doctrine of Constructive Notice is devised to protect the company against outsiders, the Doctrine of Indoor Management was meant to protect the third party or rather the outsiders from the actions of the company. In other words, Doctrine of Indoor Management states that people dealing with the company need not enquire about the internal proceedings related to the contract if they are satisfied that the transaction follows the memorandum and Articles of Association.

Origin of the Doctrine

This Doctrine of Indoor Management was first recognized in the case of Royal British Bank v Turquand. [1]

Facts of the case: The directors of the Company borrowed a certain sum from the plaintiff. The Article of the Company provided for the borrowing of money on bonds with a condition attached to it which stated that a resolution should be passed in the general meeting.  But the shareholders claimed that such resolution was not passed in the general meeting and thus the company was not liable to pay the money.

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The verdict of the Case: It was held that the Company would be liable to pay the amount. The Directors were entitled to borrow the amount only after a resolution was passed in the General Meeting, thus the plaintiff had the right to infer that the formalities were done and the resolution was passed. Turquand was thus entitled to sue the Company on the strength of the bond. Lord Hartherly in his judgment sated- “Outsiders are bound to know the external position of the company, but are not bound to know its indoor management.”

Section 290 of the Companies Act 1956 states that the Acts done by the Director would be valid irrespective of the fact that their appointment was invalid by reason of any defect or got terminated under any of the provisions laid down in the Act.

Establishment of the Doctrine

The Doctrine of Indoor Management as identified in the Turquand Case was not accepted until it was approved by the House of Lords in the case of Mahoney v East Holyford Mining Co.[2]

Facts of the Case: The Article of the Company stated that the cheque must be signed by 2 or 3 directors and the secretary. But the issue regarding this case was that the Director who signed the cheque was not properly appointed at the time of signing.

The verdict of the Court-The Court held that the Appointment of the Director came under the Internal Management of the Company thus even if the director was not properly appointed, the third party was entitled to receive or cash the cheques as he is entitled to presume that the Directors were properly appointed.

Exceptions to Doctrine of Indoor Management:

1.) Where the outsider had knowledge of irregularity– The Application of the doctrine stands repealed in cases where the outsider dealing with the company is aware of the lack of authority of the person acting on behalf of the company.

Case: In the case of Howard v Patent Ivory Co[3]., the Directors of the Company borrowed the sum of 3500 pounds from another director without the consent of the Annual General Meeting. The rule stated that no director was allowed to borrow more than 1000 pounds without the consent of the general meeting. Verdict: Since the plaintiff here was the Director and was well aware of the rules and internal irregularities, the Company would not be liable.

2.)  No knowledge of Memorandum and Articles– This doctrine shall not apply in cases where the plaintiff relies on the Company for not having knowledge of the Memorandum and Articles.

Case: Rama Corporation v Proved Tin & General Investment Co[4]. brought this exception into the limelight. As per the facts of the case, Director X of the company entered into a contract with Rama Corporation. The Articles of the Company stated that the directors may delegate their power but Rama Corporation without reading the Article and Memorandum entered the contract. It was later discovered that the Company did not delegate power to Director X.

Verdict: The Court held that the plaintiff could not take the remedy of Indoor Management for not knowing the Article or Memorandum.

3.) Forgery-The Company cannot be held liable for forgery committed by officers. Thus the Doctrine is not applicable to forged transactions which are void ab initio.

Case: In the case of Rouben v Great Fingal Consolidated,[5] the secretary of the Company forged the signatures of two directors of the Company and issued a certificate without authority.

Verdict: It was thus held that the holder of certificate could not take the remedy of Indoor Management.

4.) Negligence-The doctrine is not applicable in the case where an officer of a company does an act beyond his authority.

Case: In the case of B. Anand Behari v Dinshaw & Co (Bankers )Ltd.[6]., an accountant of the Company transferred the Company in favour of Anand Behari.

Verdict: The Court held that the Doctrine of Indoor Management won’t be applicable as the transfer would be void considering the fact that the transfer made by the accountant was beyond his authority.

5.) The doctrine would also remain inapplicable in cases where the question is with regards to the existence of an agency and not just regarding the power exercised by the agent.

The doctrine of Indoor Management in India:

The Court in the case of Lakshmi Ratan Cotton Mills Co. Ltd v J.K Jute Mills Co. Ltd[7]., declared that in any transaction of loan where the creditor entering into a contract is not barred by any charter of the company or its articles and can enter into a contract on behalf of the Company, he/she is entitled to presume that all formalities required in connection have been completed.

[1] (1856) 6 E & B 327

[2]  (1875) LR 7 HL 893

[3] (1888) 38 Ch. D. 156

[4] (1952) 1All. ER 554

[5]  (1906) AC 439

[6]AIR 1942 Oudh 417

[7] AIR 1957 All 311