The Doctrine of Indoor Management

Introduction and Origin

  • The doctrine of Indoor Management helps to protect the outsider from the illegal actions of the company. This also sets the principle that any person who is in contract with the company shall not be forced to obtain the permission of the internal committee of the company in respect of the contract.
  • This doctrine emphasizes the theory that a person working for the company and binding with the contract always operates in the good faith and shall not invoke any unjustified legal actions of the Company.
  • The person who is going to enter in any transaction with the company is required to fulfill his transaction and the contract shall not be against the company’s articles and memorandum of the company. On the contrary, if there is an internal deformity in the company then, the company shall be liable because a person has acted in good faith and he has nothing to do with the internal deformity of the company. In simple words, the person who is an outsider for a company shall have no interest in the internal affairs of the company.
  • The doctrine of Indoor Management originated from the English landmark case, Royal British Financial Institution v. Turquand,
  • In this case, the Directors of the company borrowed some money from the plaintiff. In the article of the company, it was mentioned that borrowing of money on bonds but there was a necessary condition that prescribes the resolution shall be passed in general meeting. In this case, shareholders contended that there was no such resolution passed in the general meeting so the company is not bound to pay the money. According to the resolution, the company is supposed to pay the loan back.
  • Further, it was held that Turquand can file suit against the company on the strength of the bond as he assumed that the resolution had been passed in a general meeting. Lord Hatherly in his judgment quoted that “Outsiders are bound to know the external position of the Company but are not bound to know its indoor management.”    
  • The liability of the company cannot be transferred to the outsider person of the internal actions of the company. This is called as Doctrine of the Indoor Management.
  • This doctrine is based upon the obvious reason of convenience in business relations and contributions. However, the outsider may be assumed to know the rules and constitutions but he may not know about internal functionality and changes taking place in the company.     

Exceptions to this doctrine

  • There are certain exceptions attached to this rule in which relief cannot be claimed by the outsider who is working with the company:
  • Knowledge of Irregularity: The above-mentioned rule shall not be applicable to the person dealing with a company who has knowledge about the irregularities of the company. So the person cannot claim the benefit under the rule of indoor management. In the case of T.R. Pratt Ltd v. E.D. Sassoon and co.  ‘Y’ Company lent money to Company ‘B’ on mortgaging the assets. The said condition did not comply with the condition as mentioned under articles of the company and also directors of the two companies were the same. It was held that in this case, the lender was aware of the irregularity and the mortgage was not binding.
  • Negligence: upon the efforts of the person dealing with the company found the irregularities in the company then the benefit of the rule of indoor management shall not apply. The protection under this rule shall be denied where the circumstances are suspicious and invite any kind of inquiry. But the outsider then also does not inquire about the company.
  • Forgery: This rule does not apply to dealings and transactions that involve forgery or illegal transactions that are void ab initio. In terms of the forged transaction, there is a lack of consent as the person whose wrong signatures are taken is not aware of the same.
  • In the case of Kreditbank Cassel v. Schenkers Ltd, a bill of exchange was signed by the manager of the company with his own hand but stating that he has signed on the behalf of the company is said to be forgery when the bill was drawn in favor of a payee to whom the manager has to pay the debt.

Doctrine of Constructive Notice

  • This Doctrine acts as a safety to the company while dealing with outsiders.  It can be called a company or a public body and documents such as Memorandum of Association and Article of Association of the company and open for public inspection.
  • Hence, it is presumed that person who is outside the organization has gone through the above-mentioned documents. It is the duty of the outsider person to go through the rules and regulations of the company because it is available in the public records.  
  • It can be explained under section 399 of the Companies Act, 2013 states
  • That person after the payment of prescribed fees may inspect and check any documents kept with the registrar and
  • Also, require a certificate of incorporation and other documents
  • The Memorandum of Association and Article on Association of the company are submitted with the Registrar of Companies.
  • In the case of Oakbank Oil Co. V. Crum, it was held that whoever is in the contract with the company shall be presumed to have all the knowledge and understanding of the Memorandum of Association and Article of Association. This criterion is called the doctrine of constructive notice.

Conclusion

After reading all the aspects of the doctrine of Indoor Management, it can be said that this doctrine is for the protection of interests and rights of the third parties that enter into the transactions with the company with bona fide intention. The outsider person shall conduct a proper inquiry about the internal irregularities that they are not aware of.

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