The doctrine of indoor management
Unlike the Doctrine of constructive notice, the doctrine of Indoor Management protects the outsiders against the company.
An outsider dealing with the company is not expected that he will know every detail of what is happening in the company. Neither companies internal affairs are of public matter and aren’t open for all people unlike Article of Association and memorandum of association.
Thus it can be said that the Doctrine of indoor management is the opposite of the doctrine of constructive notice.
The doctrine of indoor management lays down that when there are person conducting the affairs of the company in a manner which appears to be entirely consistent with Article of association of the company, then the person dealing with them is not to be affected by any irregularities which might have taken place in the internal management of company.
The Doctrine is also known as “Turquand Rule” because it is the genesis of the case Royal British Bank vs. Turquand
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Ratio: A person who deals with the company needs to look only into the memorandum of association and article of association to know the extent of authority and need not inquire into the regularity of internal proceedings
The company’s deed of the settlement said that company might borrow money from time to time as the general resolution of the company authorized. There was no resolution passed by the company, but money was acquired from the bank. The board borrowed money and the bond was bearing the company’s seal.
The company refused to give the money back and countered that the board never authorized that the company can borrow money and hence the company is not liable
The court rejected the plea and said that a person is bound just to read the statute and deed of settlement and do no more. It appeared on the face of it that the company hence company had followed all the procedures is liable.
Lord Hatherly observed, “Outsiders are bound to know the external position of the company, but are not bound to know it’s indoor management.”
The doctrine is based on business convenience, for the business, it is not possible to look into internal affairs of the company, and it is not possible for a person who is dealing with the company to see whether the person with whom he is dealing with has the authority.
The doctrine is convenient as well as just. It is based on the principle of Estoppel.
Section 176 of Company’s Act: No act done by a person as a director shall be deemed to be invalid, notwithstanding that it was subsequently noticed that his appointment was invalid because of any defect or disqualification or had terminated by any provision contained in this Act or the articles of the company:
Provided that nothing in this section shall be deemed to give validity to any act done by the director after his appointment has been noticed by the company to be invalid or to have terminated.
This Section is to save the person who is dealing with the company if later on it is found that the appointment of the director is invalid or it has been terminated, the company cannot take this defense.
Exceptions to the doctrine of indoor management
The mere fact that someone purports to act on behalf of the company cannot impose liability on the company. There are certain exceptions to the doctrine
- Knowledge of Irregularity
- Negligence on the part of the person who is dealing with a company
- No knowledge of AOA and MOA
- Act outside the apparent authority
- Representation through article
Knowledge of Irregularity
The doctrine has no application where a person has Express or implied knowledge that the director is not authorized to enter into a transaction. Despite knowing about this fact if a person comes into operation, it cannot seek protection under the rule of indoor management.
Howard vs. patent ivory manufacturing company
In this case, the article of the company empowered directors to borrow up to 1000 pounds only. However, they could extend the limit of 1000 pound by consent in general meeting. Without such permission, they took 3500 pounds from one of the directors who took debentures. Later on, the company refused to pay back.
The court held that the company Is only liable to pay back 1000 pounds because the director had noticed about the limit and condition.
The doctrine of indoor management does not protect the person who acts negligently. Thus where a person of a company does something which ordinarily does not come under his power, the person should make a reasonable inquiry that the person has authority to the act.
A.L. Underwood Ltd. Vs. Bank of Liverpool (1924) 1 KB 775
A person who was a sole director and principal shareholder of the company deposited into his account cheques drawn into the favor of the company. Held, that, the bank should have made inquiries as to the power of the director.
No knowledge of AOA and MOA
The doctrine of indoor management cannot be used by a person who did not consult the AOA and MOA and did not rely on them.
Rama Corporation vs. Proved Tin and General Investment (1952) 1All. ER 554
Ratio: A person does not know the company’s articles at the time of the contract, cannot rely on them as the basis of his plea of ostensible authority
Facts: A director of Plaintiff Company agreed with a director of defendant company where the two companies together will raise funds for financing the sale of goods of a third company. Director of the defendant company, on behalf of the company, took a cheque from the director of the plaintiff company. The companies article contained a clause “ the director may delegate any of their power, other than to borrow and make calls.” No power was delegated to the director who took the cheque. Plaintiff had not checked the article for the company.
Issue: whether the company was liable and bound by the agreement?
Held: A person does not know company’s articles at the time of the contract, cannot rely on them as the basis of his plea of ostensible authority or apparent authority of the agent of the company with whom he dealt.
Further, the doctrine is based on the principle of estoppel. Defendant company is not liable because if the person had read the article about the company, he would have known that the director had no power to the act.
The rule of indoor management does not apply to the transactions involving forgery or which are void ab ignition. It is not the case of absence of free consent; it is a case of no consent at all
Ruben vs. Great fall consolidated (1906) AC 439
The plaintiff was the transferee of the share certificate issued under the seal of the defendant company. The secretary issued the declaration by forging the signature of two directors. It was held that the forgery is not part of internal matter, the doctrine of indoor management will not apply to forgery
But where a company represents that a forged document is genuine, or that the person who forged the document has authority to execute the document, it will be stopped from denying that the forged document is valid to an outsider who has relied on the document.
Act outside apparent authority
If an act of an officer is one which would ordinarily be beyond the power of such an officer the doctrine of indoor management cannot be applied.
Representation through articles
The article of association generally contains the power of delegation known as “delegation clause.” A person who contracts with an individual director of a company, knowing that the board can delegate its authority to such an individual, may assume that the power of delegation has been exercised.
Freeman and Lockyer vs. Buckhurst park properties ltd.
Ratio: if a company treats a person as managing director though he has never been formally appointed as managing director, he has an ostensible authority to bind the company to the contracts made by him.
Facts: A and B together purchased a property. A Limited liability partnership was made to buy land, and both A and B along with their one nominee each became director of the company. A was acting as managing director of the company though he was never officially appointed as managing director of it. In finding the purchaser of the estate, engaged a firm of architects and surveyors and handed the applications. The architects and surveyors claimed fee for their work from the company.
Issue: Whether the acts bind a company?
Held: The court held that A was acting as managing director and all other directors had knowledge about it. Thus the act of K is binding on the company
The doctrine of indoor management is essential for efficient management of the company because it is not possible for all the outsiders who are dealing with the company to look into the internal affairs of the company. Neither the company will want to tell it’s internal affairs to the general public. Thus it saves the outsiders if there is mismanagement in the company,
Though, it is not a universal rule, as there are exceptions to it also.
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