Explanation of Doctrine Of Indoor Management with Landmark Case law
Doctrine Of Indoor Management
Doctrine of indoor management protects the interests of the outsiders, As per this doctrine the outsider is not suppose to have the knowledge regarding the internal management and functioning
of the company and his or her knowledge is merely restricted to the information mentioned in such
public documents and any irregularity in the internal management of the company will not prejudice
the rights and interests of the outsider.
Illustration: Mr.Singh director of company Zolo approached Jay for procuring raw materials on behalf of company Zolo. As per the Articles of the company the directors would be authorised to procure goods on the behalf of the company based on which Jay supplied the raw material to the company. Later on the company denied to make the payment and Jay was informed that the company had authorised director Sharma for carrying out the procurements and not director Singh. However, Jay is entitled to claim this payment from the company as Jay is not believed to have knowledge of the internal resolution passed by the company.
Royal British Bank V Turquand
In this case, the directors of the company borrowed some money from Turquand, the Articles of the company provide for the borrowing of money on bonds but there was a necessary condition that a resolution should be passed in the general meeting. In this case, the shareholders claim that as there was no such resolution passed in the general meetings hence the company is not bound to pay the money. It was held that the company is bound to pay back the loan, as the directors could borrow but subjected to the resolution hence the plaintiff had the right to infer that the necessary resolution must have been passed. It was held that Turquand can sue the company on the strength of the bond as he was entitled to assume that the necessary resolution had been passed. Lord Hatherly observed that outsiders are bound to know the external position of the company but are not bound to know about its indoor management.
Mahoney V Fast Holyford Mining Co
In this case, it was contained that in a company’s Articles that a cheque should be signed by two of the three directors of the company and also by the secretary but in this case the director who signed the cheque was not properly appointed but the court said that whether the director was properly appointed or not it comes under the internal management of the company and the third party who receives cheque were entitled to presume that the directors had been appointed properly and cash cheques.
Exceptions to the Doctrine Of Indoor Management with Case Laws
This Rule does not apply where a person relies upon a document that turns out to be forged, since nothing can validate forgery a company can never be held bound for forgeries committed by its officers. This rule does not apply to transactions involving forgery or illegal transactions which are Void Ab Initio. In the case of forged transactions, there is a lack of consent. Here the question of consent cannot arise as the person whose signature is forged he is not aware of the transaction.
Ruben V Great Fingall Consolidated
In this case the secretary of the company forged the signature of two of the directors and issued a
certificate without authority and the issue of certificate requires the sign of two directors as given in
the Article. It was held that the holder of certificate cannot take the advantage of the doctrine as it
was forged transaction which is Void Ab Initio.
The doctrine of Indoor Management in no way rewards those who have negligently behaved and
where an officer of a company does something which shall not ordinarily be within his authority.
The person dealing with him must make proper enquiries and satisfy him as to the officers authority,
if he fails to make an enquiry he is estopped from relying in the rule and with a minimum of effort
the irregularities within a company could be discovered and the benefit of the rule of Indoor
Management would not apply. The protection of the rule is also not available where the
circumstances surrounding the contract are so suspicious as to invite inquiry and the outsider
dealing with the company does not make proper inquiry.
Varkey Souriar V Keraleeya Banking Co.Ltd
In this case the Kerala High Court held that the Doctrine of Indoor Management cannot apply where
the question is not one as to scope of the power exercised by an apparent agent of a company but is
in regard to the very existence of the agency. This Doctrine is also not applicable where a pre-
condition is required to be fulfilled before company itself can exercise a particular power and in
other words the act done is not merely ultra vires the directors and officers but ultra vires the