Doctrine Of Indoor Management

Introduction

The Doctrine of Indoor Management is a 150 years old doctrine that came into existence to protect the outsiders from the company. This doctrine is the exact opposite of the doctrine of Constructive Notice. This is because while the former protects the outsiders from the company, the latter protects the company from the outsiders. Common law judgments paved way for both of these concepts as they focused upon the reasonableness, fairness, and equity of the statutory enactments.

Meaning 

To understand the meaning of the doctrine of Indoor Management, the doctrine of constructive notice should be understood. There are two important public documents in a company called the Memorandum of Association and Articles of company. These two documents provide the scope, powers, objects, duties, and limitations of the company. Hence, the company must comply with them. When an outsider enters into a contract with the company, he/she must refer to the above-mentioned documents and make sure he/she conforms with them. In the eye of the law, even if a person fails to refer them, it is assumed that he did look through it and he is in conformity with the contents of the documents. This is known as the doctrine of Constructive Notice. 

The exception to this doctrine is the doctrine of Indoor Management. The outsider needs to look into the contents of the Memorandum of Association and Articles of company. However, an outsider is not allowed to notice the internal affairs of the company. For example, let’s consider the scope of the company that is mentioned in the documents. The outsider only theoretically knows that that is the scope. But he does not whether the members of the company are acting within that scope mentioned. In simple terms, an outsider only theoretically knows how the company is operating, but not exactly as he is not allowed to watch them operate. This doctrine is also known as the Turquand Rule.

Origin

The first case that gave rise to the doctrine of Indoor Management is the Royal British Bank v. Turquand. Before dealing with the facts, it’s important to mention that the articles of the company mentioned that the directors of the company shall borrow money on bonds after passing a resolution in the general meeting. Keeping this in mind, the directors of the company borrowed money from the Plaintiff on bonds. However, they did not pass a resolution according to the articles. Hence, the Shareholders claimed that the company is not liable to pay. The court observed that the outsider while entering into a contract of the company can only be aware of the contents of the articles but not whether it is being followed by them. That is considered to be the internal affairs of the company which he/she need not be aware of. Hence, the court held that the company is liable to pay the money back. 

Exceptions

Knowledge of irregularity

Irregularity is essentially when the company does not act according to the memorandum of association and articles of association. So, if the outsider affected by the irregularity was aware of the same, then the doctrine of indoor management shall not apply. In the case of Howard v. Patent Ivory Mfg. Co., the directors were aware that they did not obtain the assent of the general meeting when they were lending money to the company. Hence, they could not invoke Turquand Rule, to defend the issue of debentures to themselves.

Suspicion of irregularity

When the outsider suspects that an irregularity exists and ignores making the necessary inquiries, he/she cannot invoke this doctrine. This is because he/she had the chance to learn about the irregularity but he/she voluntarily decided not to. In the case of Anand Bihari Lal v. Dinshaw & Company, the plaintiff accepted the transfer of the company’s property by an accountant, even though it was way beyond the scope of the accountant’s power. Hence, the court held the transfer to be void.

Forgery

When the act committed is void ab initio or involves forgery, then the question of application of the rule does not even arise. In Ruben v. Great Fingal Consolidated, the secretary of the company forged the signature of two directors and issued the certificates. The doctrine cannot be applied in this case because forgery makes the transaction void ab initio and hence the doctrine cannot be extended to cover forgery.

Representation through articles

The Articles of Association usually contains a clause that deals with the delegation clause. For example, if a company has a clause that delegates anyone or more than one of the directors to borrow money, but has not delegated, then an outsider can assume that the clause was enforced. In the case of Lakshmi Ratan Cotton Mills v. J.K Jute Mills Co, the Articles of Association authorizes its directors to borrow money and delegates that power to one or more of them. G being one of the directors, borrowed money from the plaintiff even though the company did not pass the resolution to delegate G that power. In this case, the plaintiff can assume that G had the authority through the articles.

Acts outside apparent authority

If an officer from a company does an act that is beyond his power or that is not mentioned in the Articles and the outsider contracting with him cannot avail this doctrine as it makes it clear that he did not refer to the articles like he was supposed to. In the case of Kreditbank Cassel v. Schenkers Ltd., in the name of the company, the manager of the company endorsed few bills of exchange to the payee for his debt. In this case, he was not given the authority, and hence the company is not liable.

Conclusion

The concept of Indoor Management came into existence to protect the third party from the acts of the company. In this case, the good faith of the outsider is important. Ignorance or Negligence or bad faith are explicit exceptions to this doctrine. This essentially helps the company from abusing the protection given through constructive notice.