Doctrine of indoor management

Answer 1

According to this doctrine "persons dealing with the company are entitled to presume that internal requirements prescribed in memorandum and articles have been properly observed'' For example, a company may have borrowing powers by passing a resolution according to its memorandum and articles. An outsider can only found out the borrowing powers of the company. But he cannot find out whether the resolution has in fact been passed or not. The outsiders dealing with the company are presumed to have read and understood the memorandum and articles and to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the memorandum and articles. They can presume that all are being done regularly.

SUBMITTED BY ILYAS PC KODUVALLY

Answer 2

The doctrine of indoor management will facilitate the dealings between a company and outsiders. The outsider is deemed to favor the company in this doctrine which is an exception of the doctrines of constructive notice.

Answer 3

Exceptions To The Rule

The rule of doctrine of indoor management is however subject to certain exceptions. In other words, relief on the ground of 'indoor management' cann't be claimed by an outsider dealing with the company in the following circumstances:

Ø Where the outsider has knowledge of Irregularity

Ø Suspicion of Irregularity

Ø Forgery

Ø Representation through Articles

Ø Acts outside apparent authority

1. Knowledge of Irregularity: - The first and the most obvious restriction is that the rule has no application where the party affected by an irregularity had actual notice of it. Knowledge of an irregularity may arise from the fact that the person contracting was himself a party to the inside procedure. As in Devi Ditta Mal v The Standard Bank of India[9], where a transfer of shares was approved by two directors, one of whom within the knowledge of the transferor was disqualified by reason of being the transfer himself and the other was never validly appointed, the transfer was held to be ineffective.

Similarly in Howard v. Patent Ivory Manufacturing Co[10]. where the directors could not defend the issue of debentures to themselves because they should have known that the extent to which they were lending money to the company required the assent of the general meeting which they had not obtained. Likewise, in Morris v Kansseen[11], a director could not defend an allotment of shares to him as he participated in the meeting, which made the allotment. His appointment as a director also fell through because none of the directors appointed him was validly in office.

But after the Hely-Hutchinson v Brayhead Ltd[12]., according to which the mere fact that a person is a director does not mean that he shall be deemed to have knowledge of the irregularities practiced by other directors. A newly appointed director does not mean that he shall be deemed to have knowledge of the irregularities practiced by the other directors. A newly appointed director entered into contracts of indemnity and guarantee with the company through a director whom the company had knowingly allowed to hold himself out as having the authority to enter into such transaction, although in fact he had no such authority. The company was held liable.

2. Suspicion of Irregularity: - The protection of the "Turquand Rule" is also not available where the circumstances surrounding the contract are suspicious and therefore invite inquiry. Suspicion should arise, for example, from the fact that an officer is purporting to act in matter, which is apparently outside the scope of his authority. Where, for example, as in the case of Anand Bihari Lal v. Dinshaw & co[13]., the plaintiff accepted a transfer of a company's property from its accountant, the transfer was held void. The plaintiff could not have supposed, in absence of a power of attorney, that the accountant had authority to effect transfer of the company's property.

Similarly, in the case of Haughton & co v. Nothard, Lowe & Wills Ltd[14]., where a person holding directorship in two companies agreed to apply the money of one company in payment of the debt to other, the court said that it was something so unusual "that the plaintiff were put upon inquiry to ascertain whether the persons making the contract had any authority in fact to make it." Any other rule would "place limited companies without any sufficient reasons for so doing, at the mercy of any servant or agent who should purport to contract on their behalf."

3. Forgery: - Forgery may in circumstances exclude the 'Turquand Rule'. The only clear illustration is found in the Ruben v Great Fingall Consolidates[15]; here in this case the plaintiff was the transferee of a share certificate issued under the seal of the defendant's company. The company's secretary, who had affixed the seal of the company and forged the signature of the two directors, issued the certificate.

The plaintiff contended that whether the signature were genuine or forged was apart of the internal management, and therefore, the company should be estopped from denying genuineness of the document. But, it was held, that the rule has never been extended to cover such a complete forgery.

Lord Loreburn said: "It is quite true that persons dealing with limited liability companies are not bound to enquire into their indoor management and will not be affected by irregularities of which they have no notice. But, this doctrine which is well established, applies to irregularities, which otherwise might affect a genuine transaction. It cannot apply to Forgery."

4. Representation through Articles: - The exception deals with the most controversial and highly confusing aspect of the "Turquand Rule". Articles of association generally contain what is called 'power of delegation'. Lakshmi Ratan Lal Cotton Mills v J.K. Jute Mills Co[16]. explains the meaning and effect of a "delegation clause".

Here one G was director of the company. The company had managing agents of which also G was a director. Articles authorised directors to borrow money and also empowered them to delegate this power to any or more of them. G borrowed a sum of money from the plaintiffs. The company refused to be bound by the loan on the ground that there was no resolution of the board delegating the powers to borrow to G. Yet the company was held bound by the loans. "Even supposing that there was no actual resolution authorizing G to enter into the transaction the plaintiff could assume that a power which could have been delegated under the articles must have been actually conferred. The actual delegation being a matter of internal management, the plaintiff was not bound to enter into that."

Thus the effect of a "delegation clause" is "that a person who contracts with an individual director of a company, knowing that the board has power to delegate its authority to such an individual, may assume that the power of delegation has been exercised."

The question of knowledge of Articles came up in the case of Rama Corporation v Proved Tin and General Investment Co.[17], here; one T was the active director of the defendant company. He, purporting to act on behalf of his company, entered into a contract with the plaintiff company under which he took a cheque from the plaintiffs. The company's article contained a clause providing that "the directors may delegate any of their powers, other than the power to borrow and make calls to committees, consisting of such members of their body as they think fit". The board had not in fact delegated any of their powers to T and the plaintiffs had not inspected the defendants articles and, therefore, did not know of the existence of power to delegate.

It was held that the defendant company was not bound by the agreement. Slade J', was of the opinion that knowledge of articles was essential. "A person who at the time of entering into a contract with a company has no knowledge of the company's articles of association, cannot rely on those articles as conferring ostensible or apparent authority on the agent of the company with whom he dealt." He could have relied on the power of delegation only if he knew that it existed and had acted on the belief that it must have been duly exercised.

Knowledge of articles is considered essential because in the opinion of Slade J; the rule of 'indoor management' is based upon the principle of estoppel. Articles of association contain a representation that a particular officer can be invested with certain of the powers of the company. An outsider, with knowledge of articles, finds that an officer is openly exercising an authority of that kind. He, therefore, contracts with the officer. The company is estoppel from alleging that the officer was not in fact authorised.

This view that knowledge of the contents of articles is essential to create an estopped against the company has been subjected to great criticism. One point is that everybody is deemed to have constructive notice of the articles. But Slade J brushed aside this suggestion stating constructive notice to be a negative one. It operates against the outsider who has not inquired. It cannot be used against interests of the company. The principle point of criticism, however, is that even if the directors had the power to delegate their authority. They would not yet be able to know whether the director had actually delegated their authority. Moreover, the company can make a representation of authority even apart from its articles. The company may have held out an officer as possessing an authority. A person believes upon that representation and contract with him. The company shall naturally be estopped from denying that authority of that officer for dealing on its behalf, irrespective of what the articles provide. Articles would be relevant only if they had contained a restriction on the apparent authority of the officer contained.

5. Acts outside apparent authority: - Lastly, if he act of an officer of a company is one which would ordinarily be beyond the power of such an officer, the plaintiff cannot claim the protection of the "Turquand rule" simply because under the articles power to do the act could have been delegated to him. In such a case the plaintiff cannot sue the company unless the power has, in fact, been delegated to the officer with whom he dealt. A clear illustration is Anand Behari Lal v Dinshaw[18] here the plaintiff accepted a transfer of a company's property from its accountant. Since such a transaction is apparently beyond the scope of an accountant's authority' it was void. Not even a 'delegation clause' in the articles could have validated it, unless he was, in fact, authorized.

Answer 4

The Doctrine of indoor management is a presumption on the part of the people dealing with the company such as the shareholders that the internal requirements with regard to the articles of association and memorandum of association have been complied with. The doctrine helps in protection of external members from the company and states that the people are entitled to presume that the internal proceedings are as per the documents submitted with the registrar of companies. They are not allowed to go into the procedural aspect, such as the fact that the internal proceedings might not happen regularly, or what are the proceedings before the directors, in an extraordinary general meeting.

Answer 5

Doctrine of indoor management

Memorandum of Association and articles of association are two most important documents needed for the incorporation of a company. The memorandum of a company is the constitution of that company. It sets out the (a) object clause, (b) name clause, (c) registered office clause, (d) liability clause and (e) capital clause; whereas the articles of association enumerate the internal rules of the company under which it will be governed.

Undoubtedly, both memorandum of association and the articles of association are public documents in the sense that any person under section 610 of Indian company act, 1956 may inspect any document which will include the memorandum and articles of the company kept by the registrar of companies in accordance with the rules made under the destruction of records act, 1917 being documents filed and registered in pursuance of the act. As a consequence, the knowledge about the contents of the memorandum and articles of a company is not necessarily restricted to the members of the company alone. Once these documents are registered with the registrar of companies, these become public documents and are accessible by any members of the public by paying the requisite fees. Therefore, notice about the contents of memorandum and articles is said to be within the knowledge of both members and non-members of the company. Such notice is a deemed notice in case of a members and a constructive notice in case of non-members. Thus every person dealing with the company is deemed to have a constructive notice of the contents of the memorandum and articles of the company. An outsider dealing with the company is presumed to have read the contents of the registered documents of the company. The further presumption is that he has not only read and perused the documents but has also understood them fully in the proper sense. This is known as the rule of constructive notice. So, the doctrine or rule of constructive notice is a presumption operating in favour of the company against the outsider. It prevents the outsider from alleging that he did not know that the constitution of the company rendered a particular act or a particular delegation of authority ultra vires.

The 'doctrine of constructive notice' is more or less an unreal doctrine. It does not take notice of the realities of business life. People know a company through its officers and not through its documents. The courts in India do not seem to have taken it seriously though. For example, in Dehra Dun Mussorie Electric Tramway Co. v. Jagmandardas, the Allahabad high court allowed an overdraft incurred by the managing agent of a company when under the articles the directors had no power to delegate their borrowing power.

The doctrine of indoor management is an exception to the rule of constructive notice. It imposes an important limitation on the doctrine of constructive notice. According to this doctrine "persons dealing with the company are entitled to presume that internal requirements prescribed in memorandum and articles have been properly observed". A transaction has two aspects, namely, substantive and procedural. An outsider dealing with the company can only find out the substantive aspect by reading the memorandum and articles. Even though he may find out the procedural aspect, he cannot find out whether the procedure has been followed or not. For example, a company may have borrowing powers by passing a resolution according to its memorandum and articles. An outsider can only found out the borrowing powers of the company. But he cannot find out whether the resolution has in fact been passed or not. The outsiders dealing with the company are presumed to have read and understood the memorandum and articles and to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the memorandum and articles. They can presume that all is being done regularly.

The doctrine of indoor management is also known as the TURQUAND rule after Royal British Bank v. Turquand. In this case, the directors of a company had issued a bond to Turquand. They had the power under the articles to issue such bond provided they were authorized by a resolution passed by the shareholders at a general meeting of the company. But no such resolution was passed by the company. It was held that Turquand could recover the amount of the bond from the company on the ground that he was entitled to assume that the resolution was passed.

In one of the case the rule was stated thus: "If the directors have the power and authority to bind the company but certain preliminaries are required to be gone through on the part of the company before that power can be duly exercised, and then the person contracting with the directors is not bound to see that all these preliminaries have been observed. He is entitled to presume that the directors are acting lawfully in what they do."

In another case where the plaintiff sued the defendant company on a loan of Rs.1,50,000, it was held that where the act done by a person, acting on behalf of the company, is within the scope of his apparent or ostensible authority, it binds the company no matter whether the plaintiff has read the document or not. In this case among other things the defendant company raised the plea that the transaction was not binding as no resolution sanctioning the loan was passed by the Board of directors. The court after referring to turquand's case and other Indian cases, held that the passing of such a resolution is a mere matter of indoor or internal management and its absence under such circumstances, cannot be used to defeat the just claim of a bona fide creditor.Ads by Google

The rule is based on public convenience and justice and the following obvious reasons:

1. the internal procedure is not a matter of public knowledge. An outsider is presumed to know the constitution of a company, but not what may or may not have taken place within the doors that are closed to him.

2. the lot of creditors of a limited company is not a particularly happy one; it would be unhappier still if the company could escape liability by denying the authority of officials to act on its behalf.

Exceptions to the doctrine of indoor management:

The exceptions to the doctrine of indoor management are as under:

1. Knowledge of irregularity: when a person dealing with a company has actual or constructive notice of the irregularity as regards internal management, he cannot claim benefit under the rule of indoor management. He may in some cases, be himself a part of the internal procedure. The rule is based on common sense and any other rule would encourage ignorance and condone dereliction of duty.

T.R Pratt (Bombay) Ltd. V. E.D. Sassoon & Co. Ltd., Company A lent money to Company B on a mortgage of its assets. The procedure laid down in the articles for such transactions was not complied with. The directors of the two companies were the same. Held, the lender had notice of the irregularity and hence the mortgage was not binding.

In Howard v. Patent Ivory Co, the directors had the authority under the articles to borrow only up to £1000 without the resolution of general meeting. For any amount beyond £1000, they needed the consent of general meeting. But the directors borrowed £3500 from themselves without the consent of general meeting or shareholders and accepted debentures. It was held that they had knowledge of internal irregularity and debentures were good only up to £1000.

2. Negligence: where a person dealing with a company could discover the irregularity if he had made proper inquiries, he cannot claim the benefit of the rule of indoor management. The protection of the rule is also not available where the circumstances surrounding the contract are so suspicious as to invite inquiry, and the outsider dealing with the company does not make proper inquiry. If, for example, an officer of a company purports to act outside the scope of his apparent authority, suspicion should arise and the outsider should make proper inquiry before entering into a contract with the company.

Anand Bihari Lal v. Dinshaw & Co, the plaintiff, in this case, accepted a transfer of a company's property from its accountant. Held, the transfer was void as such a transaction was apparently beyond the scope of the accountant's authority. The plaintiff should have seen the power of attorney executed in favour of the accountant by the company.

3. Forgery: the rule in turquand's case does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers. The leading case on the point is :

Ruben v. Great Fingall Consolidated Co., the secretary of a company issued a share certificate under the company's seal with his own signature and the signature of a director forged by him. Held, the share certificate was not binding on the company. The person who advanced money on the strength of this certificate was not entitled to be registered as holder of the shares.

4. Acts outside the scope of apparent authority: if an officer of a company enters into a contract with a third party and if the act of the officer is beyond the scope of his authority, the company is not bound. In such a case, the plaintiff cannot claim the protection of the rule of indoor management simply because under the articles the power to do the act could have been delegated to him. The plaintiff can sue the company only if the power to act has in fact been delegated to the officer with whom he entered into the contract.

Kreditbank Cassel v. Schenkers Ltd,a branch manager of a company drew and endorsed bills of exchange on behalf of the company in favour of a payee to whom he was personally indebted. He had no authority from the company to do so. Held, the company was not bound. But if an officer of a company acts fraudulently under his ostensible authority on behalf of the company, the company is liable for his fraudulent act.

Conclusion: Thus the doctrine of indoor management seeks to protect the interest of the shareholders who are in minority or who remains in dark about whether the working of the internal affairs of the company are being carried out in accordance with the memorandum and articles. It lays down that persons dealing with a company having satisfied themselves that the proposed transaction is not in its nature inconsistent with the memorandum and articles, are not bound to inquire the regularity of any internal proceeding

Answer 6

Doctrin of Indoor Management
This is related to Memorandum and Article of Association.