Doctrine of Indoor Management

Introduction: 

Since after the documents delivered and read with the rule of constructive notice, it is not for  every person delivered with the knowledge of the functioning inside the company because the  company’s internal machinery is handled by its officers. And if the situation is found that the  internal machinery is not according to with the external machinery which is provided under the  documents, then in such circumstances application of the doctrine of constructive notice does not  follow. And such situations result in the evolution of the doctrine of indoor management. 

Meaning: 

As opposed to the doctrine of constructive notice, this doctrine deals with the indoor working of  the company in respect of the contract which is prejudiced by the irregularities. 

Evolution of Doctrine: 

Royal British Bank v. Turquandi owes genesis to this rule. That's why this rule is also known  as Turquand Rule. 

Case Study: 

Rajendra Nath Dutta v. Shibendra Nath Mukherjeeii, this case was also similar to the  Turquand case. In this case, Doctrine was interpreted as, "if the directors have power and  authority to bind the company, but certain preliminaries are required to be gone through on the  part on the part of the company before that power can be duly exercised, 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." 

Exceptions: In the following exceptions, the scope of the doctrine has been widened. 

1. Knowledge of irregularity: If it is found that the person affected by an irregularity, he had  actual notice of it or is the person to the inside procedure, then the application of the doctrine  does not come into existence.

Case Study: (1) Morris v. Kanseeniii, in this case, the director was the part of the inside  procedure. 

Facts: 1) The director during and allotment of shares participated in the meeting which made the  allotment. 

2) Appointment of such director was not valid. 

Court's Observations: The Honorable Court held that the director could not defend such an  allotment since he has participated in the meeting. 

(2) Hely-Hutchinson v. Brayhead Ltd.iv, in this case, a slightly different application of the  above exception was provided. 

Facts: A new director was appointed, who had not any knowledge about the existing  irregularities, attended a meeting. 

Court's Observations: The Honorable Court held that the director is not liable as he had no  knowledge of the irregularity and finally the company was held liable. 

2. Suspicion of irregularity: Where the party affected find such circumstances surrounding  which makes the suspicious contract and reasonably prudent person would invite such an enquiry  for the same, in such situation of suspicion, the application of the doctrine was not provided. 

Case: Houghton & Co. V. Nothard, Lowe and Wills Ltd.v, This case provides a situation  where such an enquiry becomes unusual. 

Facts: A person holding directorship in 2 companies agreed to apply the money of one company  in payment of the debt of the other. 

Court's Observations: The Honorable Court held that such an enquiry become so unusual  whether the person making the contract had any authority in fact to make it. 

3. Forgery: Ruben v. Great Fingall Consolidated,vi provides a clear illustration to this case. 

Facts: 1) The plaintiff was the transferee of a share certificate issued under the seal of the  defendant company. 

2) The certificate was issued by the company secretary who had fixed to the seal of the company  and forged the signature of two directors.

3) It was contented by the plaintiff that whether the signatures were genuine or forged as a part  of the internal management and therefore, the company should be stopped from denying the  genuineness of the document. 

Court's Observations: But, the Honorable Court held that the rule has never be extended to  cover such a complete forgery. 

Conclusion: 

Thus, as a conclusion, it is found that the role of the doctrine of indoor management as opposed  to that of the rule of constructive notice. The latter seeks to protect the company against the  outsider whereas the former operates to protect outsiders against the company. And the  exceptions to the doctrine of indoor management can be held as a part of the application of the  rule of constructive notice. 

Payal Agrawal 

S. S. Jain Subodh Law College, Rajasthan University, Jaipur