Doctrine of Indoor Management
The doctrine of indoor management is an exception
to the rule of constructive notice. It imposes an important limitation on the
doctrine of constructive notice. According to this doctrine, a person dealing
with a company is bound to read only the public documents. He will not be
affected by any irregularity in the internal management of the company.
The rule of indoor management had its genesis in Royal
British Bank v. Turquand- The directors of the company borrowed a sum
of money from the plaintiff. The company’s articles provided that the directors
might borrow on bonds such sums as may from time to time be authorized by a
resolution passed at a general meeting of a company. The shareholders claimed
that there was no such resolution authorizing the loan and, therefore, it was
taken without their authority. The company was however held bound for the loan.
Once it was found that the directors could borrow subject to a resolution, the
plaintiff had the right to assume that the necessary resolution must have been
passed.
The rule is based on public convenience and
justice and the following obvious reasons:
1. The internal procedure is not a matter of
public knowledge. An outsider is presumed to know the constitution of a
company, but not what may or may not have taken place within the doors that are
closed to him.
2. The lot of creditors of a limited company is
not a particularly happy one; it would be unhappier still if the company could
escape liability by denying the authority of officials to act on its
behalf.
The rule/doctrine is applied to protect persons
contracting with companies from all kinds of internal irregularities. It has
been applied to cover the acts of de facto directors, who have not been
appointed but have only assumed office at the acquiescence of the shareholders
or whose appointment is defective, or have exercised authorities which could
have been delegated to them under the Act but actually not delegated, or who
have acted without quorum.
Exceptions to the
rule of “Doctrine of Indoor Management”
1)
Knowledge of irregularity A
person who has actual knowledge of the internal irregularity cannot claim the
protection of this rule, because he could have taken steps for self-protection.
A person who himself is a party to the inside procedure, such as a director is
deemed to know the irregularities, if any. T.R Pratt (Bombay) Ltd. V. E.D. Sassoon
& Co. Ltd. - Company A lent money to Company B on a mortgage of its
assets. The procedure laid down in the articles for such transactions was not complied
with. The directors of the two companies were the same. Held, the lender had
notice of the irregularity and hence the mortgage was not binding.
2)
Negligence and suspicion of irregularity: where a
person dealing with a company could discover the irregularity if he had made
proper inquiries, he cannot claim the benefit of the rule of indoor management.
The protection of the rule is also not available where the circumstances
surrounding the contract are so suspicious
as to invite inquiry, and the outsider dealing with the company does not make proper inquiry.
as to invite inquiry, and the outsider dealing with the company does not make proper inquiry.
3)
Forgery: The rule in Turquand’s case
does not apply where a person relies upon a document that turns out to be
forged since nothing can validate forgery. In Ruben v. Great Fingall Ltd,
a co was not held bound by a certificate issued by tit secretary by forging the
signature of two directions. However, in Official Liquidator v. Commr of
Police, the Madras High Court held the company liable where the
Managing Director had forged the signature of two other directors.
4)
Representation through articles: A
person who does not have actual knowledge of the company’s articles cannot
claim as against the company that he was entitled to assume that a power which
could have been delegated to the directors was in fact so delegated. In Rama
Corporation v. Proved Tin and General Investment Co, the plaintiffs
contracted with the defendant co and gave a cheque under the contract. The
director could have been authorized but in fact, was not. The plaintiffs had
not read the articles. The director misappropriated the cheques and plaintiff
sued. Held, director not liable as it was outside his authority.
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