This article has been written by Sushant Kumar of M.S. Law College, and Motihari, an intern under Legal Vidhiya
The doctrine of indoor management is a law that protects outsiders from the actions of a company. Essentially, it extends protection to third parties who enter into a contract with the company against any irregularities of the company. This law is beneficial to third parties or outsiders who are unaware of the company’s internal affairs. It is a benefit for only one-third party or outsiders. This law is the opposite of constructive notice.
The doctrine of constructive notice benefits only the company and the doctrine of indoor management benefits third parties or outsiders. The doctrine of an indoor management system is designed to prevent and detect fraud and corruption within a company and protect it from outsiders. It always promotes transparency and provides several guidelines for the company.
The doctrine of indoor management law came after the doctrine of constructive notice. First of all, there are two documents in a company called the memorandum of association and the article of association. These two documents are called public documents. These documents denote scope, power, duties, and limitations. Hence, the company must compile with them. when an outsider enters into a contract with the company. Then the document refers the company to an outsider. Outsiders know the company documents but don’t know about internal affairs. However, an outsider is not allowed to notice the internal affairs of the company. In simple terms, an outsider only knows theoretically how the company is operating, but not exactly, as he is not allowed to operate. The doctrine of indoor management law protects third parties or outsiders from internal company affairs.
The doctrine of indoor management is a concept that has good faith for outsiders or third parties. The outsider, or third party, entered into a transaction with the company. The doctrine of indoor management solves the problem of irregularities in the internal matter.
Origin:
The doctrine of indoor management is also known as Turquand’s law. The doctrine of indoor management law was developed in the Royal British Bank v. Turquand case. This doctrine was laid down in the case of the Royal British Bank vs. Turquand. Hence the alternative name for this doctrine is the Turquand rule.
The directors of the company took some money for themselves from the plaintiff. The article of incorporation provides for the borrowing of money on bonds, but it was a necessary condition that a resolution be passed in the general meeting. Now, in this case, shareholders claim that, as there was no resolution passed in the meeting, the company is not bound to pay the money. It was that the company is bound to pay back the loan. As directors could borrow but were subject to the resolution, the plaintiff had the right to infer that the necessary resolution must have been passed.
It was held that Turquand can take legal action against the company on the strength of the bond. He was given the right to take it for granted that the necessary resolution had been passed. Lord Hatherley observed, “Outsiders or third parties are bound to know the external position but are not bound to know its internal management.
Introduction:
In the 1856 Royal British Bank vs. Turquand case, the doctrine of indoor management law was introduced. Originally, this law was intended to reduce the cruelty of constructive notice of doctrine. In the case of Dey v. Pullinger, Justice Bray had rightly pointed out that the wheel of commerce would not turn smoothly. If third parties dealing with a company. Same case of Lord Simonds in the case of Morris v. Kansen, and the same situation as a constructive notice in his case.
The doctrine of indoor management is an exception to the earlier doctrine of constructive notice. It is important to note that the doctrine of constructive notice does not allow outsiders or third parties to know the internal affairs of the company. The doctrine of constructive notice sets the company against the claim of outsiders, while the convention of indoor management secures the outsider or third party against the company rule.
The doctrine of indoor management in Indian companies acts as follows: The doctrine of indoor management can also be traced to the Indian Companies Act 1956 under Section 290. The doctrine of indoor management is legal and followed by India. This principle is based on the premise that the directors are the ones who are most familiar with the company’s operations and are in the best position to manage them. The doctrine of indoor management applies to other offences committed by directors and officers of a company. The doctrine of internal management is outlined in Section 166 of the Companies Act, which states that the business of every company shall be managed by its board of directors.
The doctrine of indoor management is a legal principle in India that states that the affairs of a company are managed by its directors and officers and not by outsiders. This principle is based on English common law. Which holds that the directors and officers of a company are its agents and are not liable for its debt or other liabilities. The doctrine of indoor management has been interpreted differently by different courts in India.
Case
Mr Turquand was the office manager of the insolvent Cameron’s Coal Brook Steam, Coal, and Swansea and Loughor Railway Company. It was included under the joint stock company. The company had given a bond for £2,000 to the Royal British Bank. Which secured the company’s drawings on its current account. The band was under the company’s seal and signed by two directors and the secretary. When the company was sued, it claimed that under its registered deed of settlement (the articles of association), directors only had the power to borrow up to an amount authorized by a company resolution. A resolution had been passed but did not specify how much the directors could take for themselves.
The doctrine of constructive notice makes sure the company is against the claim of the outsider, while the agreement of indoor management secures the outsider against the company rules and provides benefits for both the outsider and the company. The rule in Turquand’s case was not accepted as strongly established in law until it was initialled by the House of Lords. In Mohany v. East Holly Mining Co., Lord Hatherley phrased the law thus. When there are persons who direct the affairs of the company in a manner that appears to be perfect by the articles of association, those dealing with them externally are not affected by irregularities. Which may take place in the internal management of the company. The article of incorporation is signed on the back by two directors and countersigned by the secretary. Whoever marked the check was selected. The internal administration of the company and the individual managing the company don’t need to be inquired about. So, in Mohany, where the company’s articles provided that checks should be signed by any two of the three named directors and by the secretary, The fact that the person who had signed the check had never been properly identified or appointed was held to be a matter of internal management, and the third party or outsider who received those checks was eligible to accept that the directors had been correctly appointed and cash the checks. The doctrine gives ideas to an outsider or third party who agrees with the organization.
https://legodesk.com/legopedia/doctrine-of-indoor-management/#:~:text=Case%3A%20Rama,void%20ab%20initio.
Rama Corporation v Proved Tin & General Investment Co. brought this exception into the limelight. As per the facts of the case, Director X of the company entered into a contract with Rama Corporation. The Articles of the Company stated that the directors may delegate their power but Rama Corporation without reading the Article and Memorandum entered the contract. It was later discovered that the Company did not delegate power to Director X.
Verdict: The Court held that the plaintiff could not take the remedy of Indoor Management for not knowing the Article or Memorandum.
Forgery-The Company cannot be held liable for forgery committed by officers. Thus, the Doctrine does not apply to forged transactions that are void ab initio.
Exception of indoor management: First is “knowledge of such irregularity.” The exception states that if a person already happens to have prior knowledge of the irregularity, he cannot, later on, seek an exemption under the doctrine. If any such outsider or third-party places dependency on a created document, he will not be allowed to try to find a remedy under the doctrine. This is because a company cannot be held liable for the acts of its public servant.
Conclusion: In my opinion, the doctrine of indoor management law is perfect for protecting an outsider or third party from a company. The purpose behind introducing the doctrine was to protect innocent outsiders or third parties who relate to the company. It was to admit that parties are not always in a position to gain access to what forms the internal management of the company. At the same time, by establishing exceptions, courts have highlighted their goals of not extending protection to the visually impaired. As previously stated, parties’ good faith cannot be used to reach an agreement. For this reason, if the parties, by any chance, have the opportunity to detect any irregularity, they must do so. The idea is to ensure fair play in the market at large. This essentially prevents the company from taking advantage of the protection by giving constructive notice. In this case, the court acted in good faith. The doctrine of indoor management is important for the outsider or third party. This concept of indoor management is good for third parties or outsiders with whom there is an unknown internal bond or internal dispute. This concept is not beneficial to the company. The doctrine of indoor management evolved as a reaction to the doctrine of constructive notice. It puts a Bar on the doctrine of constructive notice and it protects the third party who acted in the act in good faith. This doctrine protects outsiders dealing or contracting with a company.
It was analyzed that the doctrine does not operate arbitrarily, there is some restriction imposed on it like forgery, the third-party knowing irregularity, negligence, where the third party don’t read the memorandum and articles and the doctrine will not apply where the question is regarding off to the very existence of the company. An act done by governmental authorities in the course of their activities comes under the doctrine of indoor management.
Reference:- https://en.wikipedia.org/wiki/Royal_British_Bank_v_Turquand #:~:text=I% 20am% 20of% 20opinion% 20that% 20the% 20judgment % 20of% 20the% 20Court% 20of% 20Queen% 27s% 20Bench% 20ought% 20to% 20be% 20affirmed.% 20I% 20incline% 20to% 20think% 20that% 20the% 20question% 20which% 20has% 20been% 20principally% 20argued% 20both% 20here% 20and% 20in% 20that% 20Court% 20does% 20not% 20necessarily% 20arise% 2C% 20and% 20need% 20not% 20be% 20determined.% 20My% 20impression% 20is% 20(though% 20I% 20will% 20not% 20state% 20it% 20as% 20a% 20fixed https://byjus.com/commerce/the-doctrine-of-indoor-management/#:~:text=passed% 20in% 20the% 20General
https://legodesk.com/legopedia/doctrine-of-indoor-management/#:~:text=Case%3A%20Rama,void%20ab%20initio.
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