Doctrine of Indoor Management.
The doctrine of ‘Indoor Management’ states that an outsider is not bound to look into the formalities of company’s own internal functioning or the company’s internal management. So, he is not affected by any irregularity in the internal management of the company’s functioning. This is known as doctrine of ‘Indoor Management’. This doctrine was laid down in famous case of Royal British Bank vs. Turquand.
In this case, a bond had been issued by Company’s Directors to Mr. Turquand (T). Company’s Articles of Association provided that bonds could be issued only if Directors were authorized by a resolution at the Company’s Board Meeting. In the present case, no such resolution had been passed.
However, court decided in favor of T and he was entitled to have assumed that such resolution had been passed.
So, whereas the doctrine of Constructive Notice’ helps to protect the company, the doctrine of ‘Indoor Management’ helps to protect the persons (outsiders) dealing with the company. The latter is based on the principle of justice and public convenience as internal formalities of the company are not open to the public or outsiders.
Exceptions to the Doctrine of Indoor Management:
No doubt that the doctrine of indoor management is of great practical utility and has also been applied in a variety of cases involving rights and liabilities of the companies and the outsiders, yet it has the following exceptions, i.e., a person dealing with the company cannot take the benefit of this doctrine in the following situations
Knowledge of irregularity:
Where a person dealing with a company has actual or constructive (virtual) knowledge of the irregularity as regards internal management, he cannot claim the benefit of the Doctrine of Indoor Management.
In the case of Howard vs. Patent Ivory Co., the Directors of the, company could borrow on behalf of the company any amount upto £ 1,000 and for any amount beyond £ 1,000 they were required to obtain the consent of the members in General Meeting.
The Directors themselves lent to the company an amount in excess of £ 1,000 without the consent of the members. Held, the Directors had notice of the internal irregularity and hence the company was liable to them only for £ 1,000.
Suspicion of irregularities:
Sometimes, a person dealing with the company has some suspicion of irregularity regarding the internal management. In such cases also, he cannot take the benefit of the doctrine of indoor management. Sometimes, the circumstances surrounding the contract, are suspicious which invite some inquiry.
In this situation, the person dealing with the company should make proper inquiry. In the case of Underwood vs Bank of Liverpool, the sole Director of the company paid into his own account cheques drawn in favor of the company. Held, the bank was liable as it ought to have made proper inquiries before crediting the account of the Director.
No knowledge of Articles:
This rule cannot be invoked in favor of a person who did not read the Memorandum and Articles and thus did not rely on , them.
Where there is forgery:
If an outsider relies or acts on a forged, document, then also the rule of indoor management does not apply. This doctrine only applies to matters involving irregularities and not to those involving illegalities In a case the company’s secretary had issued a share certificate forging the signatures of two Directors as required under the Company’s Articles of Association. Held, the shareholder’s claim to be member was turned down.
Acts which are beyond or outside apparent authority:
In such cases also, the company is not liable. So where a person had accepted transfer of company’s property from its accountant, the transaction was held to be just null and void as it was outside the apparent authority of an accountant.