Doctrine Of Indoor Management

Key Takeaways

• What is the Doctrine of Indoor management
• Origin of the doctrine
• Exceptions to this doctrine with case laws

Introduction

In the corporate world, several concepts assist in the identification of the relationship that protects the safety of various stakeholders in the company's transactions. One such notion is the Doctrine of Indoor Management, also known as the 'Turquand's Rule’. It is a 150-year-old established idea. The Doctrine of Indoor Management is an exception to the Doctrine of Constructive Notice. The Doctrine of Constructive Noticeseeks to protect the company from outsiders, whereas the Doctrine of Indoor Management seeks to protect the outsider from the company. This doctrine emphasizes the premise that an outsider acting in good faith and entering into a transaction with a company can have a presumption that there are no internal irregularities and that the company has followed all the procedures. It also applies to government authorities.

Origin

The Royal British Bank v. Turquand (1856) 119 E.R 886 case in England gave birth to the Indoor Management Doctrine. Hence, the name 'Turquand Rule'.

The company's directors borrowed money from the plaintiff in this case. The company's articles of incorporation allowed for bond borrowing, but there was a requirement that a resolution is voted at a public meeting. 

Shareholders stated that the corporation is not obligated to pay the money because no such resolution was voted in the general meeting. 

The corporation was found to be obligated to repay the debt. 

It was held that Turquandcould sue the corporation based on the bond's strength. He had every right to presume that the required resolution had been passed. "Outsiders are required to know the company's external situation, but they are not bound to know its internal management," Lord Hatherly stated.

Exceptions to the Doctrine of Indoor Management

In the following circumstances, relief of indoor management cannot be claimed by an outsider who is dealing with the company.

Knowledge of irregularity

The benefit under the doctrine would no longer be available if the 'outsider' dealing with the company has actual knowledge of irregularities within the organization. In fact, he or she could be deemed a contributor to the irregularity. 

In T.R. Pratt(Bombay) Ltd. v. E.D. Sassoon & Co. Ltd. [(1936) 6 Comp. Cas. 90], Company A had lent money to Company B in exchange for the use of its assets as collateral. The method for dealing with such transactions, which was laid down in the Articles, was not followed. Both firms had the same board of directors. The lender was aware of such an irregularity, according to the Court, and so the transaction was not binding.

Forgery

Because nothing can justify forgery, the rule does not apply when a person relies on a document that turns out to be fabricated. A corporation cannot be held liable for the forgeries committed by its officers. The regulation does not apply to transactions involving forgeries or unlawful activity, as well as transactions that are void from the beginning. 

In Rouben v. Great Fingal Consolidated, (1906) AC 439, the secretary of the corporation faked the signatures of two of the directors and issued the certificate without permission. The signatures of two directors were required for the certificate to be issued, as stated in the article. The holder of the certificate, it was held, could not benefit from the doctrine because it was a forged transaction that was void from the start.

No knowledge of memorandum and articles

The rule cannot be applied by a person who claims that he does not understand memorandums and articles and hence didn’t rely on them. 

In Rama Corporation v. Proved Tin & General Investment Co. (1952) 1 All. ER 554, X, a company director, entered into a contract with the plaintiff while claiming to be acting on behalf of the firm, and received a check from them. The company's articles did state that the director could delegate his or her authority, but the plaintiff was unaware of this since they had not read the company's articles and memorandum. Later, it was discovered that the corporation had never delegated power to X. Plaintiffs were unable to pursue the remedy of the indoor management because they did not believe that power could be delegated.

Negligence

It does not reward those who act irresponsibly. As a result, if an officer of a corporation does something that is not normally within his jurisdiction, the person dealing with him must conduct adequate investigations and satisfy him as to the officer's authority. He is barred from relying on the rule if he fails to undertake an inquiry. 

In Anand Bihari Lal v. Dinshaw& Co A.I.R. (1942) Oudh 417, the Plaintiff had agreed to a transfer of a company's assets from the company's accountant. The court ruled that the transfer was void since it was outside the scope of the accountant's jurisdiction. It was the plaintiff's responsibility to examine the power of attorney that had been executed in favor of the accountant by the company.

Where the question is in regard to the very existence of an agency

The Kerala High Court concluded in VarkeySouriar v. Leraleeya Banking Co. Ltd. (1957) 27 Comp. Cas. 591 (Ker.), that the doctrine of Indoor management cannot apply if the question is not about the scope of power exercised by an apparent agent of a firm, but about the agency's mere existence.

Conclusion

As a reaction to the idea of constructive notice, the doctrine of indoor management was developed. It puts a stop to the notion of constructive notice and safeguards the third party that acted in good faith. This doctrine protects outsiders dealing or contracting with a company. It was determined that the doctrine does not operate arbitrarily; there are some limitations imposed on it, such as forgery, third party knowledge of irregularity, negligence, where third parties fail to read the memorandum and articles, and the doctrine will not apply where the issue concerns the company's very existence. The idea of indoor management encompasses actions taken by government agencies in the course of their duties.