Introduction

There are various principles in the corporate world that help determine the relationship which ensures the safety of various stakeholders in the company in the transactions that they undertake. The doctrine of indoor management is one such principle

The doctrine of indoor management, also known as the Turquand rule is a 150-year old concept, which protects outsiders against the actions done by the company.

Any person who enters into a contract with the company shall ensure that the transaction is authorised by the articles and memorandum of the company. There is no requirement to look into the internal irregularities, and even if there are any irregularities, the company shall be held liable since the person has acted on the grounds of good faith.

To absorb the concept of this doctrine, it is important to understand the concept of the doctrine of constructive notice

Doctrine of Constructive Notice

Section 399 of the Companies Act, 2013 states that any person may, after payment of the prescribed fees, inspect by electronic means any documents kept with the Registrar of Companies. Any person can also obtain a copy of any document including the certificate of incorporation from the Registrar.

In line with this provision, the Memorandum of Association and the Articles of Association are public documents once they are filed with the Registrar. Any person may inspect the same after payment of the fees prescribed. The special resolutions are also required to be registered with the Registrar under the Companies Act, 2013.

The doctrine presumes that every person has knowledge of the contents of the Memorandum of Association, Articles of Association and every other document such as special resolutions as it is filed with the Registrar and available for public view.

This principle has been upheld in the landmark case of Oakbank Oil Co. V. Crum (1882) 8 A.C.65. Thus, if any person enters into a contract, which is inconsistent with the company’s Memorandum and Article, he shall not acquire any rights against the company and shall bear the consequences himself.

Origin of Doctrine of Indoor Management

The doctrine originated from the landmark case Royal British Bank V Turquand (1856) 6 E&B 327. The facts of the case are as follows.

Facts

“The Articles of the company provide for the borrowing of money on bonds, which requires a resolution to be passed in the General Meeting. The directors did acquire the loan but failed to pass the resolution. The repayment on loan defaulted, and the company was held liable. The shareholders refused to accept the claim in the absence of the resolution. 

Judgment

The court held that “the company shall be liable since the person dealing with the company is entitled to assume that there has been necessary compliance with regards to the internal management.”

The rule was further endorsed by the House of Lords in Mahony V East Holyford Mining Co. [1875] 

Facts 

In this case, the Articles of the company provided that the cheque shall be signed by two directors and countersigned by the secretary. It later came to light that neither the directors nor the secretary who signed the cheque was appointed properly.

Judgment

 The court held that “the person receiving such cheque shall be entitled to the amount since the appointment of directors is a part of the internal management of the company and a person dealing with the company is not required to enquire about it.”

The above view held in the case of the House of Lords in Mahony V East Holyford Mining Co. is supported by Section 176 of the Companies Act, 2013, which states “that the defects in the appointment of the director shall not invalidate the acts done.”

The doctrine provides that the third parties who enter into a contract with the company are protected against any irregularities in the internal procedure of the company. The third parties cannot find out internal irregularities that take place in a company, hence the company will be liable for any loss suffered by them due to these irregularities.

The doctrine of constructive notice protects the company against the claim of third parties while the doctrine of indoor management protects the third parties against the company procedures.

Basis of Indoor Management

There are several reasons why the doctrine continued to be applied and came to be accepted as one of the fundamental principles of Corporate Law. 

Firstly, although the Articles of Association and Memorandum of Association are in public domain, all members of the public are not privy to the internal procedures that take place in the company and so cannot make informed decisions all the time.

Secondly, there would be great scope to abuse the doctrine of constructive notice if the doctrine of indoor management is not available. Thus, the courts of law continue to apply this theory.

• What happens internally to a company is not a matter of public knowledge. An outsider can only presume the intentions of a company, but not know the information he/she is not privy to.

• If not for the doctrine, the company could escape creditors by denying the authority of officials to act on its behalf.

Exceptions to the Doctrine of Indoor Management

Knowledge of Irregularity

This rule does not apply to circumstances where the person affected has actual or constructive notice of the irregularity. In Howard V Patent Ivory Manufacturing Company (1888), 

The Articles of the company empowered the directors to borrow up to 1,000 pounds. The limit could be raised provided consent was given in the General Meeting. Without the resolution being passed, the directors took 3,500 pounds from one of the directors who took debentures.

The court held that, “the company was liable only to the extent of 1,000 pounds. Since the directors knew the resolution was not passed, they could not claim protection under Turquand’s rule.”

Suspicion of Irregularity

In case any person dealing with the company is suspicious about the circumstances revolving around a contract, then he shall enquire into it. If he fails to enquire, he cannot rely on this rule.

In the case of Anand Bihari Lal V Dinshaw & Co, (1946), the plaintiff accepted a transfer of property from the accountant. The Court held that the plaintiff should have acquired a copy of the Power of Attorney to confirm the authority of the accountant. Thus, the transfer was considered void.

Forgery

Transactions involving forgery are void ab initio (null and void) since it is not the case of absence of free consent; it is a situation of no consent at all. This has been established in the case of Ruben V Great Fingall Consolidated.

A person was issued a share certificate with a common seal of the company. The signature of two directors and the secretary was required for a valid certificate. The secretary signed the certificate in his name and also forged the signatures of the two directors. The holder contended that he was not aware of the forgery, and he is not required to look into it. 

The Court held that the company is not liable for forgery done by its officers.

Conclusion

Doctrine of indoor management evolved as a reaction to the doctrine of constructive notice. It puts a Bar on the doctrine of constructive notice and it protects the third party who acted in the act in good faith. This doctrine protects outsiders dealing or contracting with a company.

It was analyzed that the doctrine does not operate in arbitrary manner, there are some restriction imposed on it like forgery, third party having knowledge of irregularity, negligence, where third party don’t read memorandum and articles and the doctrine will not apply where the question is regard of to the very existence of the company. Act done by governmental authorities in the course of their activities comes under the doctrine of indoor management.