INTRODUCTION:
The doctrine of Indoor Management plays an important role in the company. There are two important documents of the company name, Memorandum of Association and Article of Association. Both these documents become public documents after incorporation or registration of the company. Any person can inspect or obtain a copy of them. Persons dealing with the company are required to know about these documents because it is a constructive notice for them. But there is an exception of its Doctrine of Indoor Management of company.
Actually, the doctrine of Indoor Management is different from the doctrine of constructive notice. The doctrine of Constructive notice can be invoked by the company and it does not operate against the company, whereas the doctrine of Indoor Management can be invoked by the person dealing with the company and cannot be invoked by the company. The doctrine of Constructive notice is limited up to outside conditions. It has no relation with the internal activities of the company and there is no constructive notice about it.
Doctrine of Indoor Management
A person may peruse the available documents and may even be presumed to understand it, but can he be expected to check himself and make sure whether the written regulations and procedures are actually being followed inside the company or not. The present doctrine answers it in the negative, and thus draws the line where the responsibility of the contractor to perform due diligence ends.
The doctrine says that what happens inside the doors of a company de facto are neither concerns of the third party nor in his ability to be checked and confirmed. Once he has perused the documents available, he may legally presume that their contents are being observed in totality by the company and its representatives, and he may claim his rights on that assumption.
For instance, if the memorandum requires a certain quorum to be present during the resolution by which the contract is made, the third party may assume that such quorum was present. Even if in fact the quorum was not present, the contract would still be valid and enforceable.
Royal British Bank V Turquand (1856) 6 E&B 327
The doctrine originated from the landmark case Royal British Bank V Turquand (1856) 6 E&B 327. The facts of the case are as follows. The Articles of the company provide for the borrowing of money on bonds, which requires a resolution to be passed in the General Meeting. The directors did acquire the loan but failed to pass the resolution. The repayment on loan defaulted, and the company was held liable. The shareholders refused to accept the claim in the absence of the resolution. Held, the company shall be liable since the person dealing with the company is entitled to assume that there has been necessary compliance with regards to the internal management.
The rule was further endorsed by the House of Lords in Mahony V East Holyford Mining Co. [1875] LR 7 HL 869. 6. In this case, the Articles of the company provided that the cheque shall be signed by two directors and countersigned by the secretary. It later came to light that neither the directors nor the secretary who signed the cheque was appointed properly. Held, the person receiving such cheque shall be entitled to the amount since the appointment of directors is a part of the internal management of the company and a person dealing with the company is not required to enquire about it.
The above view held in the case of House of Lords in Mahony V East Holyford Mining Co. is supported by Section 176 of the Companies Act, 2013, which states that the defects in the appointment of the director shall not invalidate the acts done.
The doctrine provides the third parties who enter into a contract with the company is protected against any irregularities in the internal procedure of the company. The third parties cannot find out internal irregularities that take place in a company, hence the company will be liable for any loss suffered by them due to these irregularities.
The doctrine of constructive notice protects the company against the claim of third parties while the doctrine of indoor management protects the third parties against the company procedures.
Exceptions to the Doctrine of Indoor Management
1. Knowledge of Irregularity
This rule does not apply to circumstances where the person affected has actual or constructive notice of the irregularity. In Howard V Patent Ivory Manufacturing Company (1888) 38 Ch D 156, the Articles of the company empowered the directors to borrow up to 1,000 pounds. The limit could be raised provided consent was given in the General Meeting. Without the resolution being passed, the directors took 3,500 pounds from one of the directors who took debentures. Held, the company was liable only to the extent of 1,000 pounds. Since the directors knew the resolution was not passed, they could not claim protection under the Turquand’s rule.
2. Suspicion of Irregularity
In case any person dealing with the company is suspicious about the circumstances revolving around a contract, then he shall enquire into it. If he fails to enquire, he cannot rely on this rule.
In the case of Anand Bihari Lal V Dinshaw & Co, (1946) 48 BOMLR 293, the plaintiff accepted a transfer of property from the accountant. The Court held that the plaintiff should have acquired a copy of the Power of Attorney to confirm the authority of the accountant. Thus, the transfer was considered void.
3. Forgery
Transactions involving forgery are void ab initio (null and void) since it is not the case of absence of free consent; it is a situation of no consent at all. This has been established in the Ruben V Great Fingall Consolidated case [1906] 1 AC 439. A person was issued a share certificate with a common seal of the company. The signature of two directors and the secretary was required for a valid certificate. The secretary signed the certificate in his name and also forged the signatures of the two directors. The holder contented that he was not aware of the forgery, and he is not required to look into it. The Court held that the company is not liable for forgery done by its officers.
Examples of Doctrine of Indoor Management
1: Abc received a cheque from Xyz company. The Articles of Association of Xyz company provided that cheques issued by the company need to be signed by two directors and countersigned by the secretary. The directors nor the secretary who signed the cheque was appointed properly and thus the cheque issued was not valid. Abc sued the company for the irregularities in the procedure. Is Abc liable for relief?
Answer: Abc is entitled to relief and the company has to pay the amount of the cheque since the appointment of directors is a part of the internal management of the company and a person dealing with the company is not required to enquire about it.
II: Xyz receives a share certificate of ABC Limited issued under the seal of the company. The company secretary issues the certificate after affixing the seal and forging the signature of the two directors. Xyz files a lawsuit claiming that the forging of signatures is a part of the internal management of the company. Is the claim by Xyz valid and is liable to get relief?
Answer: According to the exceptions to the doctrine of indoor management, a transaction involving forgery is null and void. Since the document issued to Xyz is null and void, the claim made by him is not valid. Thus, he is not entitled to any relief.
