The Doctrine of Indoor management is also known as Turqand Rule or the ‘Article of Association’. It is a 150 year old concept through which outsiders are protected by the action of the company.
A person who enters into a contract with company should ensure that the transaction is authorised by articles and memorandum of company. So, there are no requirement for looking into the internal irregularities or even if there are any, the company should be held liable as the person has acted on grounds of good faith.
For absorbing the concept of this doctrine, its important to understand the concept of doctrine of constructive notice.
Doctrine of Constructive Notice
As per Section 399 of the Companies Act, 2013 provides that any person who after a payment of prescribed fees can inspect by any electronic means ay document which is kept with the Registrar of Companies. Any person could also obtain a copy of document which includes the certificate of Incorporation from the Registrar.
In accordance with the provision, the Memorandum of Association and Articles of association are public documents once filed with the Registrar. An individual can inspect the same after paying the prescribed fees. The Special resolution are also required to register with the Registrar under the Companies Act, 2013.
This Doctrine presumes that every person has knowledge of contents of memorandum of Association, Articles of Association and other document such as special resolutions as it is filed with the Registrar and available for public.
So, if any person gets into a contract, which is not consistent with company’s Memorandum and Article, he does not acquire any rights against the company and should bear the consequences by himself.
Origin of Doctrine of Indoor Management
It originated from the case of Royal British Bank V. Turquand (1856) it was held that any company is liable in as any outsider person who is dealing with a company is entitled to assume that necessary compliance in regarding to the internal management is being fulfilled and the decision makers in a company are aware of the decision of others.
This was further stated by the House of Lords in Mahony V. East Holy ford Mining Co.(1875). In this the Articles of company stated that the cheque shall be signed by both directors and countersigned by the secretary. It later came into knowledge that neither director nor secretary were properly appointed . So, the person who received the cheque was entitled for the amount as appointing the directors is part of internal management of company and person who deals with the company is not required to enquire about the same.
This view is supportive of the Section 176 of Companies Act, 2013 which provides that the mishandling in the appointment of the director does not invalidates the acts which were done.
It also provides that third parties who came into a contract with the company are protected against any of the irregularities in the internal procedure of company. Third parties are unable to find any internal irregularities that happen in a company, so the company will be liable for any sort of loss suffered cause of them due to these irregularities.
The Doctrine of Constructive notice provides protection to the company against any claim from third parties while the doctrine of indoor management protects the third parties against the company procedures.
Exceptions to Doctrine of Indoor Management
Below mentioned are the exceptions to doctrine which have been established this provides the circumstances under which the benefit of indoor management cannot be claimed by a person who is dealing with the company.
Knowledge of Irregularity
The rule does not apply to the circumstances where the affected person has actual or constructive notice of irregularity. In Howard V. Patent Ivory manufacturing company, The Articles of Company enhances the directors to borrow upto 1000 Pounds. This Limit could be raised by consenting in the general meeting. Without passing any resolution the directors took 3500 pounds from a director who held debentures. So, the company was liable only to the extent of 1000 pounds. Since the director were aware that the resolution was not passed so, they could not claim protection under the ‘Doctrine of Indoor Management’.
Suspicion of Irregularity
In case any person who deals with the company is suspicious about the circumstance which revolve around a contract, then he shall inquire into it. If he fails to inquire, he cannot rely on this rule.
Same as in the case of Anand Bihari Lal V. Dinshaw & Co. the petitioner accept a transfer of property from the accountant. The court laid that the petitioner should have acquired a copy of Power of Attorney to confirm the authority of accountant. So, transfer was considered Void.
Forgery
Transactions which involve Forgery are ‘Void ab Initio’ as it not a case of absence of free consent but a situation of no consent at all. It has been established in Ruben V Great Fingall consolidated case. A person who was issued a share certificate with common seal of company. The signature of two directors and secretary was required for a valid certificate. The certificate was took by the secretary and signed under his name and also forged the signatures of two directors. The holder of the certificate stated that he was not aware of the forgery , and he is not required to look into it. The court provided that the company is not liable for any forgery done by its officers.
