Introduction:
When talking about Indian Law the Board of Directors (BOD) are the one who is in charge of the company and are responsible to cope up with the company and manage it in a proper way. Due to an increase in the number of frauds the shareholders feel insecure to invest in the companies. In the corporate world there exists many principles and rules that safeguard the interest of various stakeholders of the firm. The doctrine of Indoor Management is one of them.
Few circumstances in relation to the Doctrine of Constructive Notice led to the evolution of the Doctrine of Indoor Management. The concept of doctrine of indoor management is 150 years old and is popularly known as Turquand’s rule. The doctrine of constructive notice focuses to protect the firm from the outsiders whereas the doctrine of indoor management is concerned to protect the outsiders from the organisation.
Doctrine of Indoor Management states that any outsider getting engaged in a business transaction with the firm need to conduct an inquiry that the internal proceedings of the firm are carried out in a correct manner or not. The outsider need also be satisfied that transaction is within the scope of MOA and AOA of the organisation. However, the person can’t be held responsible for internal irregularities within the organisation. In case there exist any internal irregularities then in such a case, the firm shall be held responsible as the outsider has performed the act in good faith and was totally unaware about the internal management of the firm.
Origin of the Doctrine
The evolution of Doctrine of Indoor Management can be said to have formed its base from the English case Royal British Bank v. Turquand.[1] Facts of the case stated that the AOA of the firm authorized its directors to take a certain sum of money on a timely basis after passing Special Resolution in general meeting (GM) of the firm. Two directors and a secretary of the organisation signed a bond and the bond was transferred to the plaintiff by the directors.
Turquand looked to bind the company on the ground of the bond. The court of Exchequer Chamber stated that all objection as stated in the bond shall be binding and the firm needs to adhere by it as Turquand was to believe that special resolution has been passed in the GM of the firm.[2]
Foundation of Indoor Management
This doctrine is clearly based on the reasons for providing benefits to business firms. Firstly, MOA and AOA are considered to be public documents and can be inspected by anyone. A person is assumed to have known the composition of the organisation through its MOA and AOA but the details of the internal procedure might not have been known to him.
Secondly, there would exist sufficient grounds to misuse doctrine of constructive notice if the doctrine of indoor management didn’t exist.[3]
Thus, the theory of doctrine of indoor management is continuously being applied by the court of law:
- The outsiders are not required to know about the inner happenings of the firm. He is ought to know about the intent of the firm but not required to know about the inner happenings of the firm.
- If not of the doctrine, the creditors would have contradicted the power of officials to act on this behalf.[4]
Setting Up of the Doctrine
Doctrine of Indoor Management was not given credence and was not established by law till the time it was recognised by House of Lords in the case of Mahoney v. East Holyford Mining Company.[5] The AOA of the organisation stated that in order for a cheque to pass it must be signed by two directors and one secretary. Later it was seen that on the director who signed the cheque was not been properly appointed.
So, the court gave a judgement stating that the appointment of directors comes within the ambit of inner management of the organisation and the person receiving the cheque is an outsider and is have to believe that the appointment of the director was made in a proper manner.[6]
Judicial Interpretation of Doctrine of Indoor Management
The main objective of doctrine of indoor management is to safeguard the outsiders from the firm but at the same point, the most important feature of the said doctrine is that it has enabled and enhanced the investment activities in the business sector which in turn strike balance between business and the economy.
In the case of Morris v. Kanseen[7], Lord Simmons stated that people would hesitate to engage themselves in business transactions with an organisation if they were required to check the internal working of the organisation.
When talking about the Indian judiciary they have widen the ambit of indoor management. In the case of Official Liquidator, Manasube and Company (P.) Ltd. V. Commissioner of Police[8], it was seen that the outsider before entering into a contract will obviously check AOA and MOA of the firm but will not check its legal status, proprietary and uniformity of functions of the directors.
In recent judgements, Indian Judiciary has broadened the ambit of the doctrine. However, when talking about the object of the doctrine remains the same i.e. to safeguard the outsiders from the organisation who has acted in good faith but was totally unmindful about the internal happenings of a firm.[9]
Exceptions to the Doctrine of Indoor Management
The concept of doctrine of indoor management is century old. At the present time role played by the companies has become important and occupies an important position in social life in modern communities. So, it has become essential to widen the ambit of the doctrine of indoor management. In the modern tie some of the anomaly faced by the doctrine of indoor management are:
1. Knowledge of Irregularity
According to Indoor Management, an outsider has the right to inspect the public documents but can’t include in the inner happenings of the firm. In case an outsider is engaging in a business transaction with a firm and is aware of the irregularity about the inner happenings. In such a situation doctrine of indoor management doesn’t protect the outsider. For instance, A and B are two directors of a firm. There was a transfer of shares which was approved by both the directors. The appointment of director X was not valid and Y was transferee himself which disqualified him. And all such facts were known to the transferor. So, in this situation, the transfer of shares was not binding and hence was not considered to be valid.[10]
2. Forgery
There can be situations where the documents of the firm were forged by the officer of the firm. In such a situation company can’t be held liable for the forgery done by his officers. The doctrine of indoor management doesn’t protect the outsiders from these forged documents.
In the case of Ruben v. Great Fingall ltd.[11] the complainant was the transferee of the share certificate issued under the seal of the appellant firm. The Company Secretary forged the signature of both the directors of the firm and also affixed the company’s seal. The plaintiff claimed that forged document comes within the ambit of internal regulations and he has nothing to do with it and claimed that the firm should be held liable. Lord Loreburn held that forgery was never been covered under the conception of indoor management.[12]
3. Negligence
When the third person i.e. the outsider engage in a business transaction with an organisation then the public document needs to be reviewed by him. If he would have made proper inquiries then he must have known about the non-uniformity within the organisation. In such a situation the outsider can’t seek remedy under the doctrine of indoor management.
In the case of Anand Bihar Lal v. Dinshaw & Company,[13] the accountant of the firm transferred the company’s property to the complainant. The transfer was made beyond his power. The court stated that the negligence was made on plaintiff’s part. If he has made proper inquiry then he would have come to know the transfer is void as it was made beyond the ambit of accountant’s authority.
4. Representation through Articles
When talking about the anomaly to the doctrine of indoor management this exception is the most confusing one. AOA generally contains a clause of “power of delegation.”[14]
In the case of Lakshmi Ratan Cotton Mills v. J.K.Jute Mills Company[15], B was the director of the firm. The directors of the company were allowed to borrow a certain amount of money which was authorised to them through AOA. B borrowed a certain amount of money from the plaintiff. The firm refused and stated that no such power was assigned to the directors. The court stated that the firm should be held responsible to repay the loan amount as the AOA of the firm allowed its directors to take the money and delegate the power for the same.[16]
Conclusion
The doctrine of Indoor Management developed as a retort to the Doctrine of Constructive Notice. It safeguards the third party i.e. the outsider who has acted in his good faith from the organisation. However, we have seen that there are some restrictions to the doctrine like forgery, negligence, where the third party has knowledge about the irregularity.
This rule completely focuses on the outsiders entering into a business transaction with a public company are not essential to inquire into the internal management of the organisation. The Turquand rule has subsequently been applied to many Indian cases to safeguard the outsiders from the organisation.
References:
[1] (1856) 119 E.R 886.
[2] Sushmita Singh, Doctrine of Indoor Management, Feb 2020, legalservicesIndia.com
https://www.legalservicesindia.com//doctrineofindoormanagement.html.
[3] Aman Sachan, Doctrine of Indoor Management, Feb 2015, lawoctopus.com
https://www.lawoctopus.com//doctrineofindoormanagement.html.
[4] Sushmita Singh, Doctrine of Indoor Management, Feb 2020, legalservicesIndia.com
https://www.legalservicesindia.com//doctrineofindoormanagement.html.
[5] 1875 LR 7 HL 869.
[6] Doctrine of Indoor Management under Company Law, June 2020, Legal Era
https://www.legalera.com//doctrineofindoormanagementundercompanylaw.html.
[7] 1946 1 ALL ER 586,592.
[8] 1968 38 Comp. cas 884
[9] Sushmita Singh, Doctrine of Indoor Management, Feb 2020, legalservicesIndia.com
https://www.legalservicesindia.com//doctrineofindoormanagement.html.
[10] Anshika Sharma, Doctrine of Indoor Management, July 2018, ipleaders.com
https://www.ipleaders.com//doctrineofindoormanagement.html.
[11] Ruben vs. Great Fingall Ltd,(1906).
[12] Anshika Sharma, Doctrine of Indoor Management, July 2018, ipleaders.com
https://www.ipleaders.com//doctrineofindoormanagement.html.
[13] A.I.R. (1942) Oudh 417.
[14] Sushmita Singh, Doctrine of Indoor Management, Feb 2020, legalservicesIndia.com
https://www.legalservicesindia.com//doctrineofindoormanagement.html.
[15] AIR 1957 ALL 311.
[16] Aman Sachan, Doctrine of Indoor Management, Feb 2015, lawoctopus.com
https://www.lawoctopus.com//doctrineofindoormanagement.html.
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