Analysis of Doctrine of Indoor Management

There are various principles in the corporate world that ensures safety of stakeholders as well as companies in the transactions that take place. The doctrine of indoor management is one of such principle. It is assumed that, that individual can’t see the internal irregularities of the company and in case of any internal irregularity in the company then the company will be liable as the individual has acted in the good faith after following the articles and memorandum and he didn’t know about the internal arrangement of the company. To know more about this concept, read along!

There are various principles in the corporate world that ensures safety of stakeholders as well as companies in the transactions that take place. The doctrine of indoor management is one of such principle.

Topics Covered in this article

Concept

The doctrine originated about 150 years ago with talks about protection of outsiders against the action of companies. The individual involving in a transaction with the company needs only to show that each transaction is consistent with the articles and memorandum of the company. It is assumed that, that individual can’t see the internal irregularities of the company and in case of any internal irregularity in the company then the company will be liable as the individual has acted in the good faith after following the articles and memorandum and he didn’t know about the internal arrangement of the company.

The rule is formed for providing protection and convenience to in business transactions. The articles of association and memorandum are public documents which are said to be the constitution of a company. Hence 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.[1]

Origin of the Concept

This doctrine was originated from the case of Royal British Bank v. Turquand[2]. The facts of the case were that the directors of the company borrowed some money from the plaintiff. The article provides for borrowing the money but with a necessary condition that the resolution must be passed in the general meeting. And then the shareholders decided that since this decision is not taken place in the general meeting therefore, the company is not bound to pay the money. It was held that the plaintiff can sue the company on the strength of the bond, as he was entitled to assume that necessary resolution had been passed. Lord Hatherly said, ‘Outsiders are bound to know the external position of the company, but are not bound to know its indoor management.’ It was held that the company is bound to pay back the loan, as the plaintiff had the right to infer that the necessary resolution must have passed.

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Exceptions to the Doctrine of Indoor Management

The doctrine does not apply in the following cases;

  1. When the outsider has slight knowledge about the lack of authority of the person dealing on the behalf of company. This was held in the case of Howard v. Patent Ivory Co.[3], where the plaintiff was the director himself, and therefore was having knowledge about the internal regularities.
  2. When the outsider doesn’t have knowledge about the memorandum and articles and he relied on them. In the case of Rama Corporation v. Proved Tin & General Investment Co.[4], the director entered in a contract with the plaintiff company purporting to act on the behalf of the company, he also took cheque from them. The articles of the company did provide about the delegation of the power, but here the company didn’t delegate that. It was held that plaintiff cannot take the remedy of the indoor management as they even don’t know that the power could be delegated.
  3. When the outsider acts negligently. In the case of B. Anand Behari Lal v. Dinshaw & Co. (Bankers) Ltd.[5], the accountant of the company transferred the immovable property of the company to the plaintiff and the court held it to be void as the transferring power cannot be considered within the apparent authority of the accountant.
  4. When the question is not one as to scope of the power exercised by an apparent agent of the company but is in regard to the existence of the agency.[6]
  5. When the transaction includes forgery or illegal transactions which make it void ab initio.
  6. When for exercising a particular power company needs to fulfil a pre-condition which makes the act to be ultra vires the company itself.[7]

Indian Scenario

The doctrine of indoor management is mentioned in Section 20(7) of the Companies Act, 2013. There are many Indian case laws mentioning the same concept, in Lakshmi Ratan Cotton Mills Co. Ltd Vs. J.K Jute Mitts Co. Ltd[8], where the defendant was sued for a loan and pleaded that the transaction was not binding as the same was not passed in the general meeting. The court decided that the transaction was not barred by the articles of association.  Therefore the outsider is entitled to presume that all the formalities required for such transaction are fulfilled, therefore is protected by the doctrine of internal management. Also in the case of Official Liquidator, Manasube & Co. (P.) Ltd. v. Commissioner of Police[9] it was held that it is expected from the outsider that he will read the article and memorandum when he enters into a contract with the company but it can’t be assumed that he will check the legality, propriety, and regularity of acts of directors.

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Conclusion

Doctrine of indoor management is for protecting the third party who acted in good faith, he can presume that there are no internal irregularities and all the procedural requirements are fulfilled. But it is necessary that he must be aware of the articles and memorandum of the company. It is examined that this doctrine works in controlled manner. Some restrictions placed are like forgery, third party having knowledge of irregularity, negligence etc. Act done by government authorities are under the doctrine of indoor management. In recent judgements the Indian Courts had broadened the scope of this doctrine but the object is still to protect the third party who acted in good faith and is unaware of internal management of the company.

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[1]Pacific Coast Coal Mines Ltd. V. Arbuthnot, 1917 AC 353.

[2](1856) 119 E.R 886.

[3](1888) 38 Ch  D 156.

[4](1952) 1All. ER 554.

[5]AIR 1942 Oudh 417.

[6]Varkey Souriar v. Leraleeya Banking Co. Ltd, (1957) 27 Comp. Cas. 591 (Ker.).

[7]Pacific Coast Coal Mines Ltd. v. Arbuthnot, 1917 AC 353.

[8]AIR 1957 All 311.

[9](1968) 38 Comp.cas 884 (Mad).