| Doctrine of indoor management | | | | directors. The court after referring to turquand’s |
| Memorandum of Association and articles of | | | | case and other Indian cases, held that the passing of |
| association are two most important documents | | | | such a resolution is a mere matter of indoor or |
| needed for the incorporation of a company. The | | | | internal management and its absence under such |
| memorandum of a company is the constitution of | | | | circumstances, cannot be used to defeat the just |
| that company. It sets out the (a) object clause, (b) | | | | claim of a bona fide creditor. |
| name clause, (c) registered office clause, (d) liability | | | | The rule is based on public convenience and justice |
| clause and (e) capital clause; whereas the articles of | | | | and the following obvious reasons: |
| association enumerate the internal rules of the | | | | 1. the internal procedure is not a matter of |
| company under which it will be governed. | | | | public knowledge. An outsider is presumed to know |
| Undoubtedly, both memorandum of association and | | | | the constitution of a company, but not what may or |
| the articles of association are public documents in the | | | | may not have taken place within the doors that are |
| sense that any person under section 610 of Indian | | | | closed to him. |
| company act, 1956 may inspect any document which | | | | 2. the lot of creditors of a limited company is |
| will include the memorandum and articles of the | | | | not a particularly happy one; it would be unhappier still |
| company kept by the registrar of companies in | | | | if the company could escape liability by denying the |
| accordance with the rules made under the | | | | authority of officials to act on its behalf. |
| destruction of records act, 1917 being documents | | | | Exceptions to the doctrine of indoor management: |
| filed and registered in pursuance of the act. As a | | | | The exceptions to the doctrine of indoor |
| consequence, the knowledge about the contents of | | | | management are as under: |
| the memorandum and articles of a company is not | | | | 1. Knowledge of irregularity: when a person |
| necessarily restricted to the members of the | | | | dealing with a company has actual or constructive |
| company alone. Once these documents are | | | | notice of the irregularity as regards internal |
| registered with the registrar of companies, these | | | | management, he cannot claim benefit under the rule |
| become public documents and are accessible by any | | | | of indoor management. He may in some cases, be |
| members of the public by paying the requisite fees. | | | | himself a part of the internal procedure. The rule is |
| Therefore, notice about the contents of | | | | based on common sense and any other rule would |
| memorandum and articles is said to be within the | | | | encourage ignorance and condone dereliction of duty. |
| knowledge of both members and non-members of | | | | T.R Pratt (Bombay) Ltd. V. E.D. Sassoon & Co. Ltd., |
| the company. Such notice is a deemed notice in case | | | | Company A lent money to Company B on a |
| of a members and a constructive notice in case of | | | | mortgage of its assets. The procedure laid down in |
| non-members. Thus every person dealing with the | | | | the articles for such transactions was not complied |
| company is deemed to have a constructive notice of | | | | with. The directors of the two companies were the |
| the contents of the memorandum and articles of the | | | | same. Held, the lender had notice of the irregularity |
| company. An outsider dealing with the company is | | | | and hence the mortgage was not binding. |
| presumed to have read the contents of the | | | | |
| registered documents of the company. The further | | | | In Howard v. Patent Ivory Co, the directors had the |
| presumption is that he has not only read and perused | | | | authority under the articles to borrow only up to |
| the documents but has also understood them fully in | | | | £1000 without the resolution of general meeting. |
| the proper sense. This is known as the rule of | | | | For any amount beyond £1000, they needed the |
| constructive notice. So, the doctrine or rule of | | | | consent of general meeting. But the directors |
| constructive notice is a presumption operating in | | | | borrowed £3500 from themselves without the |
| favour of the company against the outsider. It | | | | consent of general meeting or shareholders and |
| prevents the outsider from alleging that he did not | | | | accepted debentures. It was held that they had |
| know that the constitution of the company rendered | | | | knowledge of internal irregularity and debentures |
| a particular act or a particular delegation of authority | | | | were good only up to £1000. |
| ultra vires. | | | | |
| The ‘doctrine of constructive notice’ is more | | | | 2. Negligence: where a person dealing with a |
| or less an unreal doctrine. It does not take notice of | | | | company could discover the irregularity if he had |
| the realities of business life. People know a company | | | | made proper inquiries, he cannot claim the benefit of |
| through its officers and not through its documents. | | | | the rule of indoor management. The protection of |
| The courts in India do not seem to have taken it | | | | the rule is also not available where the circumstances |
| seriously though. For example, in Dehra Dun Mussorie | | | | surrounding the contract are so suspicious as to invite |
| Electric Tramway Co. v. Jagmandardas, the Allahabad | | | | inquiry, and the outsider dealing with the company |
| high court allowed an overdraft incurred by the | | | | does not make proper inquiry. If, for example, an |
| managing agent of a company when under the | | | | officer of a company purports to act outside the |
| articles the directors had no power to delegate their | | | | scope of his apparent authority, suspicion should arise |
| borrowing power. | | | | and the outsider should make proper inquiry before |
| The doctrine of indoor management is an exception | | | | entering into a contract with the company. |
| to the rule of constructive notice. It imposes an | | | | Anand Bihari Lal v. Dinshaw & Co, the plaintiff, in this |
| important limitation on the doctrine of constructive | | | | case, accepted a transfer of a company’s |
| notice. According to this doctrine “persons dealing | | | | property from its accountant. Held, the transfer was |
| with the company are entitled to presume that | | | | void as such a transaction was apparently beyond |
| internal requirements prescribed in memorandum and | | | | the scope of the accountant’s authority. The |
| articles have been properly observed”. A | | | | plaintiff should have seen the power of attorney |
| transaction has two aspects, namely, substantive and | | | | executed in favour of the accountant by the |
| procedural. An outsider dealing with the company can | | | | company. |
| only find out the substantive aspect by reading the | | | | |
| memorandum and articles. Even though he may find | | | | 3. Forgery: the rule in turquand’s case |
| out the procedural aspect, he cannot find out | | | | does not apply where a person relies upon a |
| whether the procedure has been followed or not. For | | | | document that turns out to be forged since nothing |
| example, a company may have borrowing powers by | | | | can validate forgery. A company can never be held |
| passing a resolution according to its memorandum | | | | bound for forgeries committed by its officers. The |
| and articles. An outsider can only found out the | | | | leading case on the point is : |
| borrowing powers of the company. But he cannot | | | | Ruben v. Great Fingall Consolidated Co., the secretary |
| find out whether the resolution has in fact been | | | | of a company issued a share certificate under the |
| passed or not. The outsiders dealing with the | | | | company’s seal with his own signature and the |
| company are presumed to have read and understood | | | | signature of a director forged by him. Held, the share |
| the memorandum and articles and to see that the | | | | certificate was not binding on the company. The |
| proposed dealing is not inconsistent therewith, but | | | | person who advanced money on the strength of this |
| they are not bound to do more; they need not | | | | certificate was not entitled to be registered as holder |
| inquire into the regularity of the internal proceedings | | | | of the shares. |
| as required by the memorandum and articles. They | | | | |
| can presume that all is being done regularly. | | | | 4. Acts outside the scope of apparent |
| The doctrine of indoor management is also known as | | | | authority: if an officer of a company enters into a |
| the TURQUAND rule after Royal British Bank v. | | | | contract with a third party and if the act of the |
| Turquand. In this case, the directors of a company | | | | officer is beyond the scope of his authority, the |
| had issued a bond to Turquand. They had the power | | | | company is not bound. In such a case, the plaintiff |
| under the articles to issue such bond provided they | | | | cannot claim the protection of the rule of indoor |
| were authorized by a resolution passed by the | | | | management simply because under the articles the |
| shareholders at a general meeting of the company. | | | | power to do the act could have been delegated to |
| But no such resolution was passed by the company. | | | | him. The plaintiff can sue the company only if the |
| It was held that Turquand could recover the amount | | | | power to act has in fact been delegated to the |
| of the bond from the company on the ground that | | | | officer with whom he entered into the contract. |
| he was entitled to assume that the resolution was | | | | Kreditbank Cassel v. Schenkers Ltd,a branch manager |
| passed. | | | | of a company drew and endorsed bills of exchange |
| In one of the case the rule was stated thus: | | | | on behalf of the company in favour of a payee to |
| “If the directors have the power and authority | | | | whom he was personally indebted. He had no |
| to bind the company but certain preliminaries are | | | | authority from the company to do so. Held, the |
| required to be gone through on the part of the | | | | company was not bound. But if an officer of a |
| company before that power can be duly exercised, | | | | company acts fraudulently under his ostensible |
| and then the person contracting with the directors is | | | | authority on behalf of the company, the company is |
| not bound to see that all these preliminaries have | | | | liable for his fraudulent act. |
| been observed. He is entitled to presume that the | | | | Conclusion: Thus the doctrine of indoor management |
| directors are acting lawfully in what they do.” | | | | seeks to protect the interest of the shareholders |
| In another case where the plaintiff sued the | | | | who are in minority or who remains in dark about |
| defendant company on a loan of Rs.1,50,000, it was | | | | whether the working of the internal affairs of the |
| held that where the act done by a person, acting on | | | | company are being carried out in accordance with the |
| behalf of the company, is within the scope of his | | | | memorandum and articles. It lays down that persons |
| apparent or ostensible authority, it binds the | | | | dealing with a company having satisfied themselves |
| company no matter whether the plaintiff has read | | | | that the proposed transaction is not in its nature |
| the document or not. In this case among other things | | | | inconsistent with the memorandum and articles, are |
| the defendant company raised the plea that the | | | | not bound to inquire the regularity of any internal |
| transaction was not binding as no resolution | | | | proceeding. |
| sanctioning the loan was passed by the Board of | | | | |