Doctrine of Indoor Management – Rule in Turquand’s case

Doctrine of Indoor Management – Rule in Turquand’s case

Introduction

This Doctrine of Indoor Management is an age-old principle that was established in the perspective of the ‘Doctrine of Constructive Notice’ more than 150 years ago and since then is popularly known as the Turquand’s Rule. The Doctrine of Indoor Management is an exception to the Doctrine of Constructive Notice. The main objective of the Doctrine of Indoor Management is to ensure that the outsiders are protected from the company while the Doctrine of Constructive Notice ensures that the company is protected from the outsiders.

The Doctrine of Indoor Management as a concept explains the underlying principle that when an outsider enters into a contract with the company in good faith, then the outsider can presume that no such irregularities exist and as such all the procedural requirements have been complied by the company accordingly. Despite the existence of the requirement that the outsiders must be well-versed and consciously aware of the Memorandum and Articles of Association of the respective company for the purpose of seeking remedy, yet the government authorities are also covered under the ambit of this doctrine.

Origin and Development of the Doctrine of Indoor Management

The Royal British Bank v. Turquand was the case through the Doctrine of Indoor Management originated which is the main reason why this doctrine is popularly known as the ‘Turquand Rule’. Through a special resolution passed in the General Meeting of the company, the Articles authorize the Directors to borrow money from time to time through bonds. A bond was signed by the Company’s Secretary and the 2 Directors under the seal of the company where the plaintiff was authorized to draw from the current account without the authority of any resolution. On the basis of this bond, Turquand sought to bind the action taken by the company. So, the question of whether the company can be held liable for the bond or not was challenged in this case. It was held by the court that since Turquand was permitted to have the presumption that the company’s resolution was passed in the general meeting of the company, hence the bond was binding on the company accordingly.

This doctrine was further elaborated in detail in the case of Mahony v. East Holyford Mining Co. It was mentioned that the cheque must be signed by atleast 2 directors and a secretary in the Articles but it was discovered later that neither the Secretary nor those Directors had been appointed properly. The court finally held that the any person receiving such a cheque is eligible to the stated amount in the cheque because appointing directors is an integral part of a company’s management, therefore such a person is not required to make an enquiry regarding the same.

Documents such as Memorandum and Articles of Association are entitled for inspection by the public since they are considered as public documents but despite the existence of this provision, the actual state of affairs is often unknown the general public. The reason for the entitlement of presumption given to outsiders that all the internal protocols are being complied by the company is that the very same outsiders are quite oblivious as to what is actually happening with respect to the internal affairs of the company.

Provision under the Indian Companies Act, 1956

Section 290 – Validity of Acts of Directors

“Acts which have been done by a person as the Director shall/can be valid notwithstanding that later it may be discovered that his appointment was invalid due to any disqualification or defect or was terminated by any provision of the Act or the Articles. Provided that nothing in the section shall give validity to any of the Acts done by a Director after his appointment has been shown to the company to be invalid or terminated.”

Exceptions to the Doctrine of Indoor Management

1. Knowledge of Irregularity

This doctrine is not applicable to cases where outsiders who were dealing with the company had the knowledge or very well aware that the said person who was acting on behalf of the company did not have the authority to do so.

2. Forgery

This doctrine does not apply to cases where a forged transaction was committed by its officers, thus not making the company liable for the act.

3. Negligence

This doctrine is not applicable to cases where negligent acts have taken place. This means that the doctrine does not apply in cases where an act is performed by a person and the same does not come under his power or authority to do the same.

4. Acts outside the scope of the apparent authority

This doctrine is not applicable to cases where the said act done by the officer does not come under his authority or power of such an officer.

5. Representation through Articles

There is a delegation clause present in the Articles which provides for power of delegation. It means that the person transacting business with the company may assume that the person purporting to conclude the transaction must have been delegated the said power.

References

1. Royal British Bank v. Turquand, (1856) 6 E&B 327
2. Mahony v. East Holyford Mining Co., (1875) LR 7 HL 869

Author: Haritha Malepati,
3rd year BBA LLB, Symbiosis Law School, Hyderabad