The Doctrine of Indoor Management by Shikha at LexCliq

The doctrine of constructive notice assumes that everyone is aware of the contents of the Memorandum of Association, Articles of Association, and any other document filed with the Registrar and available for public inspection, such as special resolutions under section 399 of the Companies Act, 2013. In simple words this doctrines stated that if a person enters into a contract with a company that is inconsistent with the company’s Memorandum and Articles, that person will not have any rights against the company and will be responsible for the consequences because of the doctrine of constructive notice which presumes the knowledge on part of such person about the company’s Memorandum and Articles.

However, there is an exemption to this rule, known as the doctrine of indoor management, which safeguards outsiders or person who has enter into contract with the company from the company’s actions which are outside of outsiders knowledge. Anyone who enters into a contract with the company must make sure that the transaction is approved by the articles of association and memorandum of the company. There is no requirement to investigate internal irregularities, and even if there are, the company will be held liable because the person acted in good faith. As a result, the doctrine protects third parties that engage into a contract with a company from any irregularities in the company’s internal procedures. Because third parties are unable to detect internal irregularities in a firm, the company will be held accountable for any losses incurred as a result of these irregularities.

The case of Royal British Bank v Turquand[1], is the origin point of this doctrine of indoor management. The following are the facts of the case: The company’s Articles allow for bond borrowing, which needs a resolution voted by the General Meeting. Although the directors were able to obtain the financing, they were unable to pass the resolution. The debt was not paid back, and the corporation was held accountable. In the lack of a resolution, the shareholders declined to accept the claim. As a result, the company will be held liable because everybody engaging with the company has the right to expect that all internal management requirements have been met.

Exceptions to the Doctrine of Indoor Management

A person engaging with the company may not be able to claim the benefit of indoor management in certain conditions. These are the following:

  • Knowledge of Irregularity

This rule does not apply if the person who is impacted is aware of the irregularity either directly or indirectly. The Articles of the company in Howard V Patent Ivory Manufacturing Company[2], permitted the directors to borrow up to 1,000 pounds. The limit could be increased with the approval of the General Meeting. The directors got 3,500 pounds from one of the directors who took debentures without the resolution being passed. The corporation was only liable for 1,000 pounds, according to the ruling. The directors couldn’t use rule the doctrine of indoor management to claim protection because they knew the resolution wouldn’t pass.

 

  • Suspicion of Irregularity

If anyone interacting with the company has a suspicion about the conditions surrounding a contract, he should inquire about it because later on they cannot seek the protection of Indoor Management doctrine. The plaintiff in Anand Bihari Lal V Dinshaw & Co[3], accepted a property transfer from the accountant. The plaintiff should have obtained a copy of the Power of Attorney to validate the accountant’s authorization, according to the Court. As a result, the transfer was deemed null and invalid.

 

  • Forgery

Forgery-related transactions are void from the start (null and void).  The Ruben V Great Fingall Consolidated case [4]established this. A share certificate with the company’s common seal was issued to a person. A valid certificate required the signatures of two directors and the secretary. The secretary falsified the signatures of the two directors and signed the certificate in his own. The holder claimed that he was unaware of the counterfeit and that he is not obligated to investigate it. The corporation is not accountable for forgeries committed by its officers, according to the court.

 

  • Acts outside apparent authority

If an officer of a corporation does something that would normally be beyond his or her authority, the plaintiff cannot invoke the  Indoor Management Doctrine. because the right to conduct the act could have been assigned to him under the articles. In this instance, the plaintiff will be unable to sue the firm unless the power has been assigned to the officer with whom he dealt.

 

  • Negligence

When a company official performs something that is not normally within his authority, the person dealing with him must make appropriate enquiries and satisfy him as to the officer’s authority. He is barred from relying on the rule if he fails to undertake an inquiry.

 

 

[1]  (1856) 6 E&B 327

[2](1888) 38 Ch D 156

[3] (1946) 48 BOMLR 293

[4] [1906] 1 AC 439

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