Doctrine of Indoor Management

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. Both the concept of indoor management and constructive notice is explained below.

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. 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. Held, 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] LR 7 HL 869. 6. 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. Held, 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 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 the third parties who enter into a contract with the company is 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.

Exceptions to the Doctrine of Indoor Management

Listed below are the exceptions to the doctrine that have been judicially established, which provide circumstances under which the benefit of indoor management cannot be claimed by a person dealing with the company.

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) 38 Ch D 156, 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. Held, 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) 48 BOMLR 293, 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 Ruben V Great Fingall Consolidated case [1906] 1 AC 439. 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 contented 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.

Examples of Doctrine of Indoor Management

• Abc received a cheque from Xyz company. The Articles of Association of Xyz company provided that cheques issued by the company need to be signed by two directors and countersigned by the secretary. The directors nor the secretary who signed the cheque was appointed properly and thus the cheque issued was not valid. Abc sued the company for the irregularities in the procedure. Is Abc liable for relief?

Answer: Abc is entitled to relief and the company has to pay the amount of the cheque 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.

• Xyz receives a share certificate of ABC Limited issued under the seal of the company. The company secretary issues the certificate after affixing the seal and forging the signature of the two directors. Xyz files a lawsuit claiming that the forging of signatures is a part of the internal management of the company. Is the claim by Xyz valid and is liable to get relief?

Answer: According to the exceptions to the doctrine of indoor management, a transaction involving forgery is null and void. Since the document issued to Xyz is null and void, the claim made by him is not valid. Thus, he is not entitled to any relief.

Frequently Asked Questions

Why is it known as the Turquand rule?

The doctrine of indoor management is also known as the Turquand rule as this doctrine was founded in the case of ‘Royal Bank v Turquand’. It was in the Turquand case, the court held that the outsiders are bound to know the external position of the company, but are not bound to know its indoor management. Thus, it is called the Turquand rule.
 

Is there any provision for the doctrine of indoor management under the Companies Act, 2013?

No. There is no specific provision relating to the doctrine of indoor management under the Companies Act, 2013. However, the courts in India have recognised this doctrine in various cases and thus followed in India.
 

Is the doctrine of indoor management applicable in India?

Yes. The Indian courts have applied the doctrine of indoor management in cases like ‘Dewan Singh Hira Singh v. Minerva Mills Ltd’. In this case, under the company’s articles, the directors had the power to allot only 5,000 shares. However, they allotted above 13,000 shares.

The Court held that the allottees of shares were contracting in good faith with the company, and they were entitled to assume that the acts of the directors in making allotments to them were within the scope of their powers conferred upon them by the shareholders of the company. They were not bound to inquire whether the acts of the directors which related to internal management had been properly and regularly performed.
 

What is the basis of the doctrine of indoor management?

The doctrine of indoor management is based on obvious reasons of convenience in business relations for third parties with a company. It is based on the rule that what happens internally in 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 this doctrine, the company could escape creditors by denying the authority of officials to act on its behalf. 
 

From where can I get the Memorandum of Association and Articles of Association of the company?

Any person can obtain a copy of the Memorandum of Association and Articles of Association of the company after paying the prescribed fees to the Registrar of Companies where the company is registered. A person can also apply for these documents online on the MCA portal by paying the prescribed fees. An individual can also procure a copy of the incorporation certificate from the Registrar of Companies.

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.