STUDY NOTES: WHAT IS DOCTRINE OF INDOOR MANAGEMENT?

By Anish Sinha 15 Minutes Read

INTODUCTION

The Doctrine of Indoor Management serves as a guiding principle to address the delicate balance between legal formalities and practical business operations in the complex field of corporate law, where numerous complexities arise from the multifaceted interactions between corporations and their stakeholders. The “Turquand Rule,” or Doctrine of Indoor Management, was created by the courts to lessen the severe repercussions that could occur if third parties were required to adhere to stringent guidelines for confirming internal corporate regularities prior to doing business with a company.

This legal principle, with a history stretching back more than a century, safeguards a company’s internal operations from outside scrutiny. It essentially establishes a boundary between a company’s internal management and its dealings with outsiders. This means that if someone is entering into a contract with the company acts in good faith and the agreement adheres to the company’s governing documents, they are protected from unexpected consequences arising from the company’s internal issues. Even if there are irregularities within the company, the company itself holds responsibility for the actions of its employees taken in good faith. This eliminates the need for outsiders to investigate the company’s internal matters before entering into contracts.

The doctrine of indoor management shields outsiders who rely on the seeming authority of an organization’s officers or agents, even in cases where the company’s internal governance regulations have not been strictly adhered to, while the doctrine of constructive notice assumes that outsiders dealing with a company are aware of its publicly available documents (such as its Memorandum and Articles of Association).

LAWS REGARDING INDOOR MANAGEMENT

According to Section 399[1], anyone may electronically access any papers held by the Registrar of Companies upon payment of the required fees. The Registrar also provides copies of all documents, including the certificate of incorporation, to anyone who requests them. According to this clause, after being registered with the Registrar, the Memorandum of Association and the Articles of Association become public records. Once the required payments have been paid, anyone may see the materials. Under the Companies Act of 2013, the special decisions must also be registered with the Registrar.

The seminal case of Oakbank Oil Co. v. Crum (1882)[2] supported this principle. Therefore, if someone signs a contract that conflicts with the firm’s memorandum or articles, they will not be able to sue the company and will be responsible for any repercussions.

Notwithstanding any internal violations or non-compliance with the company’s internal governance policies, the doctrine permits outsiders to depend on the apparent authority of a company’s officers and representatives.

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The outsider is protected by the doctrine of indoor management, for instance, For example, if a company’s Articles of Association require a resolution of the board of directors for certain transactions, but a director acting on behalf of the company without proper authorization enters into such a transaction with an outsider, the outsider is protected by the doctrine of indoor management.

ORIGIN OF DOCTRINE

The doctrine of Indoor management took birth from landmark case of English court Royal British Bank v. Turquand[3]. In this case Turquand, the managing director of The Royal British Bank, signed a loan contract with a financial institution. According to the articles of association of the company, directors are authorized to borrow money on the firm’s behalf, subject to specific restrictions. The bank took its cue from Turquand’s apparent ability to borrow on the company’s behalf. Subsequently, it was discovered that the board resolution approving the borrowing had not been entered into the business’s minute book. Consequently, the business objected to loan repayment, claiming improper authorization for the borrowing. The main question on the court’s agenda was whether the bank could still obtain the loan from the corporation in spite of the irregularity in the board resolution. And now the court’s bench was with issue that whether the bank, despite of the irregularity of the board resolution, could recover the loan from the company.

Finally, court here decided that bank should not be punished for the company’s failure to appropriately record the board resolution because it was unaware of the irregularities. This ruling established the rule that third parties doing business with a corporation are not required to look into or doubt the regularity of the company’s internal procedures unless there are extraordinary circumstances. People who conduct business with firms in good faith are protected by the ruling, which has had a major impact on company law.

It was held that Turquand can sue the company on the power vested in the bond. As he was entitled to assume that the necessary resolution had been passed. Lord Hatherly observed- “Outsiders are bound to know the external position of the company, but are not bound to know its indoor management.”

“Section 290[4] provides for the validity of acts of directors- acts done by a person as a director shall be valid, notwithstanding that it may afterward be discovered that his appointment was invalid by reason or any defect or disqualification or had terminated by virtue of any provisions contained in this act or in the articles:

Provided that nothing in this section shall be deemed to give validity to acts done by a director after his appointment has been shown in the company to be invalid or to have terminated”

Further although backed with reasoning this rule was not accepted as rigid law until it was approved and authorised by the House of Lords in Mahoney v. East Holyford Mining Co.[5] In this case, it was reported in the company’s article that a cheque should be necessarily signed by two of the three directors including the secretary. But here in the mentioned case, the appointment of director who signed the cheque was in question. So, as a result court held that question of appointment of director comes under the preview of internal management of the company and the third party who receives cheque is entitled to presume that the directors had been properly appointed.

RELEVENCY AND APPLICLIBLITY OF DOCTRINE

The doctrine persisted in being used and eventually gained recognition as one of the core tenets of corporate law for a number of reasons. First off, even while the company’s Articles of Association and Memorandum of Association are available to the public, not everyone in the public has access to the internal workings of the organization, which means they are not always able to make well-informed judgements. Second, if the idea of indoor management were unavailable, there would be a lot of room for abuse regarding the constructive notice doctrine. Thus, this approach is still used in legal proceedings.

EXCEPTIONS OF THE DOCTRINE OF INDOOR MANAGEMENT

This doctrine has some limitations, such as situations in which a foreigner is not entitled to protection[6]. Further this doctrine will not apply to the situation when the party entering the contract is aware of and a party to the internal process. For instance, court in Morris v. Kansseen[7],the rule did not apply to a director who attended the shareholder meeting where the shares in question were allocated.

The doctrine will not work in situations where the individual contracting with the company is suspicious about the circumstances revolving around the contract. If such suspicion arises, he must enquire about the same and if he fails to enquire, he cannot claim protection under the doctrine. In the case of Anand Bihari Lal v. Dinshaw and Co.[8], the plaintiff entered into a property transfer agreement with an accountant. In its ruling, the court concluded that the plaintiff had the responsibility to obtain a copy of the Power of Attorney as a means to validate the accountant’s authority. Consequently, due to the plaintiff’s failure to fulfil his obligation, the property transfer was declared null and void by the Court’s judgment.

The doctrine again fails to function when there is forged and tainted transactions is present as they are void from the beginning since the problem is not merely that free consent is not present; rather, it is the total lack of consent. In the case of Ruben v. Great Fingall[9],Court consolidated, the situation where a shareholder provided a share certificate containing the common seal of the business, this fundamental idea was upheld. The company secretary and two directors’ signatures were needed to certify the certificate. Still, the secretary signed and then went ahead and faked the signatures of the two directors. The certificate’s owner argued that he was immune to investigation since he was unaware of the fake certificate.

CONCLUSION

To the best of our knowledge, the constructive notice theory is being opposed by the indoor management theory. It protects the third party that acted honorably towards the corporation by limiting the applicability of the constructive notice doctrine. This concept contradicts the notion of constructive notice, which protects third parties from an organization’s activities. To the best of our knowledge, the constructive notice theory was opposed by the indoor management theory. It protects the third party that acted honorably towards the corporation by limiting the applicability of the constructive notice doctrine. This concept contradicts the notion of constructive notice, which protects third parties from an organization’s activities.

The case of Royal British Bank v. Turquand[10], enhanced the fundamental principles of Common law of contracts by providing clarification on the idea of indoor management. In order to address the problems with the Constructive Notice Doctrine, the Court created the criterion. When transactions with an officer or expert other than the Board are involved on behalf of the third party, it becomes significant. The ruling’s standard is commonly known as “Turquand’s standard” or the “indoor management rule.”

The basic tenet of the standard is that limited liability company managers would undoubtedly look at their indoor management and won’t be persuaded by irregularities they were not aware of. Most of the time, the Turquand standard has been used similarly, primarily to safeguard the interests of the party transacting business with the company’s directors. As demonstrated by publicly accessible data like the mandatory director registrations, it is currently impossible to claim, under the standard, that a party conducting business with a corporation is unaware of the identity of the genuine directors.

[1] Companies Act of 2013.

[2] Oakbank Oil Co. V. Crum (1882) 8 A.C.65. 

[3] [1843-1860] All ER 435 5.

[4] Companies Act, 1956.

[5] Mahony v. East Holyford Mining Co., [1875] LR 7 HL 869. 6.

[6] Section 59 of companies act, 2013

[7] [1946] 16 comp. Cas 186 (HL).

[8] Anand Bihari Lal v. Dinshaw & Co (1946) 48 BOMLR 293.

[9] Ruben v. Great Fingall Consolidated [1906] 1 AC 439.

[10] Supra note 3.

Anish Sinha