This article is written by Khizra Khan of 6th semester of CSJMU, Kanpur, an intern under Legal Vidhiya.
ABSTRACT
There are many provisions under the Companies Act, 2013 on which the company works. But laws made under this act cannot cover every aspect of company. So, some doctrines are made for help. One of which is the Doctrine of Indoor Management which protect the outsiders from the company. This doctrine is 150 years old and is also known as Turquand Rule and is the exact opposite of the doctrine of Constructive Notice. So, this article contains research about the Doctrine of Indoor Management by discussing the development of doctrine, its legal status and relevant case laws under this doctrine.
KEYWORDS
Companies Act, 2013, Doctrine of Indoor Management, Doctrine of Constructive Notice, Development, Case Laws.
INTRODUCTION
The Doctrine of Indoor Management is one of the oldest concepts and is commonly known as Turquand rule. Its primary objective is to protect other parties from company’s conduct. This doctrine emphasizes that the other party whose actions are in good faith and has entered into a transaction with a company can presume that there are no irregularities internally and all the procedural requirements have been compiled with by the company. Though, it is essential for the outsider to be well informed with the Memorandum and Articles of Association of the company in order to seek remedy for the same. The doors of management are closed for outsiders that are why it is called the Doctrine of Indoor management.
For understanding the doctrine of indoor management, we should have an understanding of the concept of doctrine of constructive notice. So, a brief recommendation of this concept is given here.
DOCTRINE OF CONSTRUCTIVE NOTICE
Under this doctrine, it is presumed that we have knowledge or data regarding the Articles and Memorandum of the company. Memorandum and Articles need to be registered with the Registrar and once registered these became public documents and are accessible to all the persons. It is therefore duty of every person who has been dealing with a company to inspect its public documents and make sure that his contract is in acquiescence with their provisions. So, this duty of reading and understanding the said provisions of the Memorandum and Articles of the company is presumed and construed to have been performed. This presumption or construction is said to be Constructive Notice.
PURPOSE
The doctrine of constructive notice is the outcome of the need to secure from the outsiders when they look to deceive the company by alleging their unawareness with the contents of the memorandum and articles and trying to evade their contractual liabilities of accusing the company of fraud, as the case may be.
DOCTRINE OF INDOOR MANAGEMENT
The doctrine of Indoor Management is said to be a legal principle which is followed in India. This doctrine stipulates that the internal affairs of the company are to be controlled and managed by its directors and not the outsiders. This doctrine protects external members of the public when the directors of an organization abuse their seat of authority and indulge in wrong usage of the powers they enjoy. In simple words, the outsiders who enter into any transaction with the company believe that everything inside company is functioning smoothly even if the case may be. So, such outsiders need to be well-versed with the memorandum of the company.
In Charnock collieries Co. Ltd. v. Bholanath Dhar (3), determined by the Calcutta High Court, the court ruled that the lender has the right to believe that the managing agent was permitted or approved by the Board of Directors. When the lender provided funds to the company, he was led to think that the managing agent had obtained the Board of Directors’ approval for borrowing of certain sums.
ORIGIN
This doctrine had its genesis in the case of Royal Bank v Turquand (4). In this case, the directors of Royal British Bank had powers under the articles of association to issue bonds provided. They were authorized by a resolution passed by the shareholders at a general meeting of company. The directors issued a bond to Turquand but before the bond was issued, no resolution was passed by the company authorizing the directors to do so. On maturity of bonds, the company refused to redeem bonds. It is held that the Turquand had right to receive money from the company because he had the right to assume that company had passed the necessary resolutions because it is the internal matter of company for which the door of company is closed for outsiders.
The rule of Indoor Management was first implemented in India in the case of Raja Bahadur & Others v. The Tricumdas Mills Co. (Ltd) (5). The court ruled that the appellant and his legal counsel had every right to consume that what was being done was legal and legitimate, and that all requirements for the execution of the contract, which was executed by the respondent’s company, which had been satisfied prior to the execution of that document. The appellant and his attorneys were unaware that the defendant corporation’s Board of Directors lacked the minimum number of Directors required by its Articles of Association. The attorneys for the plaintiff had every reason to think that the needed settlement had previously been approved timely and in acceptable way.
So, the memorandum and articles of association are public documents and hence can be inspected by public. But whatever is happening internally in the company is not known to public. An outsider is clueless to the internal procedures of the company and hence the outsiders are entitled to presume that all the internal procedures are catered by the company.
POSITION UNDER THE INDIAN COMPANIES ACT, 1956
The doctrine of Indoor Management can also be traced in the Indian Companies Act, 1956 which imbibes the Turquand Rule is section 290, which is explained as follows:
Section 290: – Validity of acts of directors: – Acts done by an individual as a director will be considered valid, though it might a short time later be found that his appointment was invalid by reason of any deformity or exclusion or had ended by ethicalness of any provision contained in this act or in this section.
Another provision that straight forwardly adheres to the above expressed guideline in the section 81 of the Indian Companies Act, 1956 which bears the heading ‘further issue of offers’. Genuine allotters of offers are ensured by this doctrine under section 81.
EXCEPTIONS
There are certain cases where benefit of Doctrine of Indoor Management is not available to outsiders. Following are some exceptions:
- Knowledge of Irregularity
When a person dealing with company has actual knowledge of irregularity as regards internal management and despite this knowledge, he deals within the company; he is not entitled to claim protection under this doctrine.
CASE:
HOWARD VS PATENT IVORY COMPANY (6)
The directors of Patent Ivory Company mere empowered to borrow up to $1000 and if they want to borrow than this amount, they shall have to take the consent of shareholders in general meeting of company. Mr. Howard, one of directors of company himself lent $3,500 to company, in excess of borrowing power of company without getting the resolution passed in general meeting of company. When company refused to fund money, Mr. Howard filed a suit against the company. It was held, since he had notice of internal irregularity, the company would be liable to director only to extent of $1000.
MORRIS V. KANSSEN (1946) (7)
Similarly, in this case, a director could not defend an allotment of shares to him as he participated the meeting which made allotment. His appointment was also feel through because none of the directors appointing him was validly in office.
- Negligence
When a person could discover irregularity with a little effort on his part but negligently fail to do so he shall not be entitled to benefit of Doctrine of Indoor Management.
CASE:
UNDERWOOD VS BANK OF LIVERPOOL (8)
The director of company was principle shareholder of company. He used to deposit the cheques favoring the company in his personal account. The bank used to credit those cheques in his personal account instead of crediting in account of company. A suit was filed against bank by company on behalf of debenture holders. The bank requested the protection of Doctrine of Indoor Management. It was held that bank is not entitled to the benefit of this doctrine, because the bank could discover irregularity by little effort that cheques were being deposited in personal account of Director.
- Forgery
This doctrine does not apply where a person relies upon forged document. Therefore, Turquand’s rule does not apply on forgery.
CASE:
RUBEN VS GREAT FINGALL CONSOLIDATED COMPANY (9)
A share certificate was forged by the secretary of company. By forging the signature of two directors and issued to Mr. Ruben under seal of company without authority against a sum of money lent to company. Later, the company refused to register the share certificate. Mr. Ruben filed a suit for damages and coveted the benefit of doctrine of indoor management. It was held that he is not entitled to the benefit of Turquand’s rule because it does not apply in forgery i.e. where document is forged.
- Acts outside the apparent authority
The doctrine of indoor management does not apply when an officer of company enters into a contract with the third party who is apparently outside his authority and the company shall not be liable for such contracts.
CASE:
ANAND BIHARI LAL VS DINSHAW & COMPANY (10)
In this case, Anand Bihari Lal purchased the property of Dinshaw & Co. from its accountant, who has apparently no authority to it. When a company refused to with property, Anand Bihari Lal filed a suit against the company and sought the benefit of doctrine of indoor management. It was held that he is not entitled to benefit not of this doctrine as the transaction was apparently beyond the scope of authority of accountant.
CASE LAW
OAKBANK OIL COMPANY V. CRUM (1882) (1)
This case was decided by the UK Privy Council in 1882. The 5- judge bench stated that the person dealing with the company is taken not only to have read those documents but to have understood them according to their proper meaning.
RIDELY V. PLAYMOUTH GRINDING AND BAKING COMPANY (1848) (2)
It was held that the person is presumed to have understood not merely the company’s powers but also those of tit’s officers.
CONCLUSION
The doctrine of indoor management is one of the oldest concepts that has been basically designed to protect outsiders against the companies they are dealing with. This doctrine protects outsiders managing or contracting with a company and it was analyzed that this doctrine does not operate in renowned manner but there are some restrictions imposed on it. This doctrine can’t be applied in situations where actual notification of incapability to follow the inside techniques is issued. The idea of indoor management encompasses actions taken by government agencies in the course of their duties.
Hence, this doctrine is a deep-rooted company law concept. It is accepted as a sound regulation that gives adequate protection to individuals dealing with the corporate in their role as independent third party. The act done by the governmental authorities in the course of their activities comes under this doctrine.
However, with the change in time, exceptions to the doctrine of indoor management have also been enumerated favoring the companies. We need to consider going through this article to know about the doctrine of indoor management deeply
REFERENCES
- The Oakbank Oil Co. (Ltd) v. Crum. 8 Ac 65, s.l.: SLR, 1881.
- Ridley v. Plymouth Grinding and Baking Co. 2 Exch. 711.
- Charnock Collieries Co. Ltd v. Bholanath Dhar. 0035, WB: s.n., 1911.
- Royal Bank v. Turquand. 6 E&B 327. 1856.
- Raja Bahadur & Others v. The Tricumdas Mills co. ILR 36 Bom 564. 1912.
- Howard v. Patent Ivory Co. 38 Ch D 156. 1888.
- Morris v. Kanssen. Ac 459. 1946.
- Underwood v. Bank Of Liverpool. 1 KB 775. 1924.
- Ruben and Ladenberg v. Great Fingall Consolidated Co. 1 AC 439. 1906.
- Anand Bihari Lal v. Dinshaw & Co. 48 BOMLR 293. 1946.
- Sahil Varshney & Rajat Shandilya, Manupatra, http://articles.manuaptra.com/article-details/Analysis-of-Doctrine-of-Indoor-Management.
- Mayashree Acharya, Doctrine of Indoor Management, cleartax (February 1st, 2022), http://cleartax.in/s/doctrine-indoor-management
- Anshika Sharma, Doctrine of Indoor Management, ipleaders (July 3, 2018), https://blog.ipleaders.in/doctrine-indoor-management-2/
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