The Doctrine of Indoor Management OR The Rule laid down in Royal British Bank v. Turquand
Introduction
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 authority that could have been delegated to them under the Act but actually not delegated, or who have acted without a quorum.
Exceptions to the rule
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 a 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 because 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 the plaintiff sued. Held, director not liable as it was outside his authority.
Keywords: Doctrine of Indoor Management, Doctrine of Indoor Management in India, Doctrine of Indoor Management in Companies Act.
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