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Doctrine of Indoor Management – Meaning, Basics And Exceptions

Introduction:

The doctrine of indoor management is also known as “TURQUAND’S RULE”. The doctrine of indoor management protects outsiders, who have entered into any contract with the Company, by placing the parties in the first place and companies policy, behind it, i.e. if a company is said to enter into a contract, the obligations of following companies policies fall on the member of the Company and not on any party, who enters a contract with the company. The doctrine of indoor management is opposite to the doctrine of Constructive notice, at the same time it protects the right implementation of the doctrine of constructive notice, by balancing the scale.

Turqunad’s Rule:

Turquand’s Rule arose from the case, Royal British Bank vs Turquand[1], The facts of the case are as follows:

The directors of the Company borrowed a sum of money from the Royal British Bank (Plaintiff). The company’s articles provide that, the directors of the company might borrow such sums with bonds, as may be authorized by a resolution passed at a general meeting of the Company. The shareholders of the company deny repaying the loan, borrowed by the directors, as no such resolution was passed by the Company, in authorizing the borrowed sum as a loan.

The shareholders also claim that the amount was borrowed, without their authority. The Court held that the Company is bound by the loan, whatever, the companies articles provide. As director of a company is in the authorized position, as per the outsider. Thus, the Royal British Bank is entitled in a position to recover its money lent to Defendant. The Court observed that “Outsiders are bound to know the external position of the company, but are not bound to know its indoor management.”[2]

doctrine of indoor management

This is the cause for the emergence of Turquand’s Rule as a spark and it got landmarked by the House of Lords, in the case of Mahony v. East Halford Mining Company[3]. Here, money is withdrawn by de facto directors, which is against its articles as, Cheque should be signed by two of three directors, along with the Company’s Secretary. The Court held that, the withdrawal Cheque signed by one of its directors is valid and the Company is liable for its indoor policies, as the director of a Company is an authorized position, as held in re, Turquand’s[4] case. This principle was also followed in Sree Meenakshi Mills Ltd v. Callianjee & Sons[5].

Basis of Doctrine of Indoor Management:

The rule is based on obvious reasons of convenience in business relations for any parties with a Company.

The memorandum of association and articles of association are public documents, which are open to the public for inspection; whereas internal procedures aren’t. The opaque nature of these procedures puts the internal affairs in a position of echoing, within the company and cannot be raised as any defence against its liability, from its act of the directors.

In Pacific Coast Coal mines Ltd v. Arbuthnot[6], it was observed that “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.”[7]

In Dewan Singh Hira Singh v. Minerva Mills Ltd,[8], illustrates the exemption of this rule, with its facts, as follows:

Under a Company’s Articles, the directors had the power to allot only 5,000 “A” class shares. They, however, went much beyond and 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.[9]

According to Gower in Modern Company Law[10], he explains that “The lot of creditors of a limited company is not particularly happy one; it would be unhappier still if the company could escape liability by denying the authority of the officials to act on its behalf.”[11]

Exceptions To Doctrine Of Indoor Management:

Knowledge Of Irregularity:

This is the foremost exception to Turquand’s Rule, as the advantage of Turquand’s rule cannot be gained by persons, who has already have a knowledge of irregularity in company’s internal management. This would mislead the doctrine of indoor management, at the same time, would null the doctrine of Constructive notice’s purpose.

In Devi Ditta Mal v. Standard Bank of India[12], “Thus where a transfer of shares was approved by two directors, one of whom within the knowledge of the transferor was disqualified by reason of being the transferee himself and the other was never validly appointed, the transfer was held to be ineffective.”[13]

The decisions in Hely- Hutchinson v. Brayhead Ltd,[14] in this case, gave a slightly different view on exempting, newly appointed directors, who might not have any knowledge about irregularities, happening within the company, but, still enters into Contracts of indemnity or guarantee with the company had knowingly allowed to hold himself out as having the authority to enter in such transactions, which, actually, he does not holds. But, the principle is clear in not allowing any person to take advantage of irregularity, when he is also a part of internal machinery.

Suspicion Of Irregularity:

The “Turquand Rule” does not protect certain transactions, which arose in a suspicious circumstance and surroundings, as held in Anand Behari Lal v. Dinshaw & Co[15], where, the plaintiff accepted a transfer of a company’s property from its accountant, who doesn’t hold the authority in involving in that transaction, but still he signs the agreement of transfer of company’s property The above transaction is invalid, as the accountant doesn’t hold the power of attorney, to effect the transfer of company’s property. Thus, the transaction is void, with the suspicion of irregularity at prima facie and that, involves an inquiry to check the authority.

Forgery:

“Turquand rule” may be excluded in circumstances of forgery. The clear illustration can be explained with Ruben v. Great Fingall Consolidated[16],

A Company’s Secretary has issued a share certificate, by forging the signature of two directors, in that certificate to the plaintiff, who was the transferee of the share. The plaintiff contended in the Court, about the nature of the forged signature, under the doctrine of indoor management. Lord Loreburn, in his words, said ”It is quite true that persons dealing with limited liability companies are not bound to inquire into their indoor management and well not be affected by irregularities of which they have no notice. But this doctrine, which is well established, applies to irregularities which otherwise might affect a genuine transaction. It cannot apply to forgery.”[17]

This was criticized by the case, “The tort of a Company’s servant”[18], by the following, “We hold the company liable as a matter of social and economic policy. The basis of liability is the eminently practical view that if authority is conditioned on facts peculiarly within the agent’s knowledge, his representation express or implied should bind the principal.”[19]

Representation To Articles:

The exception to “Turquand’s Rule” under the perspective of representation to articles is not fixed. It differs highly from every case. The case of, Lakshmi Ratan Cotton Mills Co Ltd v. JK Jute Mills Co Ltd, explains the delegation perspective.

In this case, the director of a Company had many managing agents under his control. Articles of the company authorized the director to borrow money and to delegate this to any or more of his managing agents. The director borrowed a sum of money from the plaintiffs, and the company refused inbounding with the loan borrowed by the director of the Company. It was held that, “Even supposing that there was no actual resolution authorizing the director to enter into the transaction, the plaintiff could assume that a power which could have been delegated under the articles must have been actually conferred. The actual delegation being a matter of internal management, the plaintiff was not bound to enter that.”[20]

The act of authority is beyond the power of such delegation, then, it cannot be claimed under this perspective, as held in Anand Behari Lal v. Dinshaw & Co.[21]

As discussed above, the facts of the case of transfer of Company’s property can be said as acts outside apparent authority and those cases are exempted at the instance.

doctrine of indoor management

Conclusion

The doctrine of indoor management allows hassle-free business transactions by an outsider with the Company, by laying trust on the doctrine, laid in Turq.

Frequently Asked Questions on Doctrine of Indoor Management

What is Doctrine of Indoor Management?

The Doctrine of Indoor Management is a common law doctrine which protects outsiders who have entered into the contract with the company, by placing the parties in the first place and company’s policy behind it.

What does the Doctrine of Indoor Management Protects?

The Doctrine of Indoor Management protects outsiders from the company’s affairs.

Is the Doctrine of Indoor Management and Turqunad’s Rule same?

Yes. The Doctrine of Indoor Management is also known as Turqunad’s Rule. Therefore both are same.

Doctrine of Indoor Management was established in which case?

The Doctrine of Indoor Management was established in Royal British Bank Vs Turquand case

Doctrine of Indoor Management is also known as?

Doctrine of Indoor Management is also known as the Turqunad’s Rule.

[1] (1856) 6 E&B 327; 119 ER 886.

[2] Re. (1856) 6 E&B 327; 119 ER 886.

[3] (1875) LR 7 HL 869, 893.

[4] Re. (1856) 6 E&B 327; 119 ER 886.

[5] AIR 1935 Mad 799.

[6]  1917 AC 607.

[7] Re. 1917 AC 607.

[8] AIR 1959 Punj106.

[9] Re. AIR 1959 Punj106.

[10] (3rd edition 1969) 153.

[11] Re. (3rd edition 1969) 153.

[12] AIR 1927 Lah 797.

[13] Re. AIR 1927 Lah 797.

[14] (1968) 1 QB 549.

[15] AIR 1942 Oudh 417.

[16] 1906 AC 439.

[17] Re. 1906 AC 439.

[18] 13 Can Br 116.

[19] Re. 13 Can Br 116.

[20] AIR 1957 All 311.

[21] AIR 1942 Oudh 417.

This article has been written by Subha Mohan S, 5th Year, B.A.LL.B. (Hons.) student at VELS Institute of Science Technology and Advanced Studies (VISTAS).

Also Read – Doctrine of Constructive Notice: Meaning And Characteristics

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