Introduction
The doctrine of indoor management aims and operated to protect outsiders from a company. It entitles the outsiders to assume that all acts and internal procedures comply with the documents in possession of the Registrar of Companies. The outsider who is entering into a contract with the company needs to satisfy that the transaction he propose is in strict compliance with the documents of the company, i.e. Articles and Memorandum of Association. The MoA and the AoA are officially public documents and therefore open to inspection by the public. The inner workings and procedures of a company, however, are not open to public inspection.
Therefore, in Pacific Coast Coal Mines Ltd vs. Arbuthnot[1], it was said that an outsider is presumed to know the constitution of a company; but not what may or may not have take place within the doors that are close to him.
Origin
The Doctrine of Indoor Management had its inception in the case of Royal British Bank vs. Turquand[2]. In this case, the directors of a company borrowed a sum of money from the plaintiff. The company’s articles provide that the directors might borrow on bonds such sums. As may from time to time be authorize by a resolution pass at a general meeting of the company. The shareholders then claim that there had been no such resolution authorizing the loan. Therefore, it is taken without their authority. The company was, however, held bound by the loan. Once it is found that the directors could borrow subject to a resolution, the plaintiff had the right to infer. That the necessary resolution will pass. Therefore, this rule was establish for convenience in business relations.
Exceptions
The doctrine is over 150 years old, so naturally, its scope widened over time. The rule is not subject to some exceptions:
Knowledge of irregularity:
The first and most discernible exception is if the affected outsider knew of the irregularity. The knowledge of any irregularity may arise if the person contracting is involve in the internal procedures of the company. In the case of Howard vs. Patent Ivory Mfg Co[3], the directors were not in the position to defend the debentures issuance to themselves because they ought to have known the extent to which they were lending money to the company and that it required the assent of the general meeting which they did not obtain.
However, in Hely Hutchinson vs. Brayhead Ltd[4], the trend was modified and it was held that the sole fact that a person is a director does not mean that he is entitled to the knowledge of the irregularities in the inside procedures. A newly appointed director did not know about irregularities within the company. The company was held liable in this case. Besides this modification, the doctrine is thoroughly clear as to the implication of insiders possessing knowledge of the irregularities.
Suspicion of irregularity:
The protection of the doctrine of indoor management is not available where the circumstances surrounding the contract a suspicious. Therefore, invite inquiry. Suspicion should arrive, from the fact that an offer is purporting to act in a manner that is apparently outside the scope of his authority. In Anand Behari Lal vs. Dinshaw & Co[5], the plane curve accepted a transfer of a company’s property from its accountant, the transfer was held void. The plaintiff could not have supposed, in the absence of a power of attorney, the accountant had the authority to effect the transfer of the company’s property.
Forgery:
In case of forgery, under exceptional circumstances, the doctrine may be excluded from use. There have not been a legion of instances save for the case of Ruben vs. Great Fingall Consolidated[6] where the plaintiff was the transferee of a share certificate issued by the defendant company. The certificate, however, was issue by the company’s secretary. The one who, as it was later found, had forge the signatures of two directors. The plaintiff contend that whether or not the secretary had forge the signatures was an internal matter. Therefore, the company should be estopped from denying the genuineness of the share certificate. However, it was decide by Lord Loreburn that the secretary did not have the actual or implied authority. Espeicially to represent that a forge document was genuine and, therefore, there was no estoppel issue against the company. Therefore, the protection by the Turquand rule was exclude.
Conclusion
The purpose of the doctrine of indoor management is in contrast to the purpose of the doctrine of constructive notice. The rule of constructive notice seeks to protect the company against the outsider whereas the doctrine of indoor management operates to protect outsiders against the company. The role of constructive notice is limited to the external position of the company. Therefore it is obvious that there is no notice as to how the company’s internal machinery is handle by its employees. If the contract is consistent with the documents, the person contacting will not be subject to the irregularities that may surround the inner workings of the company. However, the rule is subject to certain exceptions such as forgery, irregularity, and suspicions of the irregularities.
The object of this rule was to protect third parties or outsiders contracting with the companies. Since the outsiders are not privy to the inner workings of a company, they are entitle to believe that the company is functioning in compliance with the documents.
Acts committed by governmental authorities are also under the purview of this rule. In MRF vs. Manohar Parrikar[7], the doctrine did not apply to the state of Goa simply due to the fact that there was an irregularity that should have been taken care of and possession of the knowledge of an irregularity does come under the exceptions of the doctrine of indoor management.
Reference:
[1] 1917 AC 607: 117 LT 613 (PC)
[2] (1856) 6 E&B 327
[3] (1888) LR 38 Ch D 156
[4] (1968) 1 QB 549
[5] AIR 1942 Oudh 417
[6] 1906 AC 489
[7] (2010) 11 SCC 374
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