The Doctrine of Indoor Management
Doctrine of Indoor Management is another important chapter for commerce asspirant as it strikes a balance between the need for corporate governance and the protection of third-party interests
Shruti Dutta20 May, 2024
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The doctrine of Indoor Management plays a crucial role in keeping stakeholders safe. This doctrine is like a shield, rooted in legal rules and written in company law, that helps individuals and businesses stay protected when dealing with companies.
Unlike the Doctrine of Constructive Notice, which focuses on external documents, the Doctrine of Indoor Management looks inside the company. It ensures that people dealing with a company are safe from any problems happening within the company itself. This article will explore where this doctrine came from, what it is all about, and why it's so important in today's corporate world. By understanding this concept, you'll see how it helps keep businesses running smoothly and ensures fairness for everyone involved in business transactions. So, let's dive in and uncover the secrets of indoor management in the Doctrine!Doctrine of Indoor Management Overview
The principle of indoor management, also known as 'Turquand's Rule,' is an exception to the doctrine of constructive notice aimed at safeguarding external parties dealing with companies. This concept, dating back 150 years to the landmark case of Royal British Bank v Turquand, was established to shield outsiders from potential risks associated with corporate dealings. The definition of the indoor management doctrine asserts that individuals transacting with a company need only be familiar with its Memorandum or Articles of Association. They are not obligated to know of the company's internal irregularities. Individuals acting in good faith are protected from liability if any irregularity arises within the company.Origin of Doctrine of Indoor Management
The doctrine of indoor management , originating from the landmark case Royal British Bank v Turquand (1856) 6 E&B 327, plays a pivotal role in corporate law. This principle protects third parties engaging with a company by allowing them to assume compliance with internal management requirements. In the Turquand case, despite the directors' failure to adhere to the company's Articles regarding borrowing money on bonds, the court ruled that individuals dealing with the company could reasonably expect such compliance. This doctrine was further affirmed by the House of Lords in Mahony v East Holyford Mining Co. [1875] LR 7 HL 869. Here, despite the improper appointment of directors, transactions involving the company were upheld, emphasising the doctrine's application. Section 176 of the Companies Act 2013 supports this stance by stipulating that defects in director appointments do not invalidate actions taken. Overall, the doctrine of indoor management ensures that third parties are protected from internal irregularities within a company, highlighting the importance of this principle in corporate governance.| Also Read | |
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The Doctrine of Constructive Notice
When people or organisations make agreements with other companies, they need to check certain documents available to the public. This is to make sure that everyone knows what they're agreeing to. This idea is called the Doctrine of Constructive Notice. According to the Companies Act 2013, anyone can look at documents the Registrar of Companies keeps by paying a fee. These documents include the Memorandum of Association, Articles of Association, and special resolutions. It's assumed that everyone knows what's in these documents because they're available for anyone to see. This was shown in a big court case called "Smith v. Eastwood," where it was decided that if someone agrees to something that goes against a company's documents, they can't expect the company to follow through, and they'll have to deal with the consequences on their own.Exception Of The Doctrine of Indoor Management
While the Doctrine of Indoor Management protects outsiders dealing with a company, certain exceptions apply. These exceptions arise when the outsider has actual or constructive notice of irregularities within the company's internal affairs.- Exception for Notice of Irregularity : The principle concerning irregularities does not hold when the affected individual is aware of the irregularity through direct knowledge or constructive notice. An illustrative case is Howard V Patent Ivory Manufacturing Company (1888) 38 Ch D 156, where the company's articles permitted directors to borrow up to 1,000 pounds, with the possibility of extending this limit subject to General Meeting consent. Despite needing more necessary resolution, directors obtained 3,500 pounds from one director who issued debentures. Consequently, the company's liability was restricted to 1,000 pounds, as the directors' awareness of the resolution's absence precluded them from invoking protection under Turquand’s rule.
- Requirement for Inquiry in Suspicion of Irregularity : When a party dealing with the company harbours suspicions regarding contractual circumstances, it is incumbent upon them to conduct inquiries. Failure to do so renders them unable to rely on the aforementioned rule. This principle is exemplified in the case of Anand Bihari Lal V Dinshaw & Co, (1946) 48 BOMLR 293, wherein the plaintiff, accepting a property transfer from the company's accountant, was deemed to have shouldered the responsibility of acquiring a copy of the Power of Attorney to ascertain the accountant's authority, thereby rendering the transfer void.
- Acts Beyond Apparent Authority : If a company member engages in activities exceeding the scope delineated by the company's articles, the counterparty cannot avail themselves of this doctrine. The company is only liable if the member's actions align with powers delegated to them by the articles. Essentially, the plaintiff may hold the company accountable only if the member's actions fall within the bounds of authority prescribed in the articles.
- Representation through Articles : This exception to the Doctrine of Indoor Management can be perplexing. It posits that if the company's articles delegate certain powers to a member without necessitating a board resolution, it is reasonable to assume that such delegation is valid. In such cases, the company cannot assert defence based on the absence of a board resolution, as the granting of power is inferred from the articles themselves.
- Invalidity due to Fabrication or Forgery : Transactions involving fabrication are deemed void ab initio, as they lack genuine consent. This principle, elucidated in the Ruben V Great Fingall Consolidated case [1906] 1 AC 439, underscores that forged or fabricated elements nullify any purported agreement. For instance, in the mentioned case, where a share certificate bore forged signatures, the holder, unaware of the forgery, was absolved from scrutiny. The court held the company accountable for the actions of its officials, emphasising the company's responsibility to prevent and address such misconduct.
Examples of Doctrine of Indoor Management
The Doctrine of Indoor Management shields a company's outsiders from irregularities within its internal management as long as they act in good faith. Here are a couple of examples to illustrate this doctrine:Example: Faulty Appointment and Valid Cheque
ABC Ltd., a company, has a provision in its Articles of Association (AoA) that mandates cheques to be signed by two directors and countersigned by the secretary. However, the directors and secretaries who signed a specific cheque needed to be appointed following the proper procedures as outlined in the AoA. Dispute : ABC Ltd. issues a cheque to XYZ Company but later refuses to honour it, citing irregularities in the appointment of signatories. XYZ Company sues ABC Ltd. for the cheque amount. Doctrine of Indoor Management in Action : Since XYZ Company was unaware of the internal irregularity in the appointment of signatories and acted in good faith while entering into the transaction, the Doctrine of Indoor Management applies. In this case, the court would likely rule in favour of XYZ Company, and ABC Ltd. would be liable for paying the cheque amount. As long as XYZ Company acted in good faith, it is protected by the Doctrine of Indoor Management, even though ABC Ltd. had an internal irregularity. Begin your journey towards academic excellence in Commerce with our comprehensive Class 11 Commerce courses . Master the CBSE syllabus with expert guidance and ace your exams. Enroll now!”Doctrine of Indoor Management FAQs
What is the document referred to as the Doctrine of Indoor Management?
The Articles of Association (AOA) is called the 'Doctrine of Indoor Management'.
What does the Doctrine of Indoor Management entail in India?
Section 166 of the Companies Act outlines the Doctrine of Indoor Management, stating that “the business of every company shall be managed by its board of directors.” This section also grants the board the authority to delegate specific powers to committees, individual directors, or company officers.
What is the Turquand rule?
The Turquand rule dictates that any outsider entering into a contract with a company in good faith can assume that internal procedures and requirements have been duly complied with.
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