The doctrine of indoor management is an exception to the rule of constructive notice. According to the rule of constructive notice, a person dealing with the company is deemed to have knowledge of the memorandum and the articles of the company. If he enters into a transaction with the company which is ultra vires, he cannot treat the transaction as binding on the company.
The doctrine of indoor management on the other hand argues that outsiders dealing with the company are entitled to assume that everything had been regularly done so far as its internal proceedings are concerned. The doctrine had its origin in a famous case, “Royal British Bank vs. Turquand”.
Case Law: Royal British Bank vs. Turquand (1856)
The directors of the Bank issued a bond to Mr. Turquand. The articles provided that the directors had the power to issue bond if authorized by proper resolution of the company. No such resolution was passed. It was held that Turquand could sue on the bond as he was entitled to assume that the resolution must have been passed. It was observed that persons dealing with the company are bound to read the registered documents and to see that the proposed dealings are not inconsistent therewith, but are not bound to do more. They need not inquire into the irregularity of internal proceedings.
The doctrine is however, subject to the following exceptions:-
(a) Knowledge of irregularity: - A person who deals with the company and who has knowledge of the irregularity in its internal management in connection with the subject matter of his dealings cannot claim the benefit of the rule in Turquand’s case.
(b) Negligence: - A person cannot claim the benefit of the rule in Turquand in circumstances under which he would have discovered the irregularity if he had made proper inquiries. Further, where circumstances surrounding the transaction are suspicious, and therefore invite inquiry, the outsider cannot claim the benefit of this rule.
(c) Forgery: - The rule in Turquand’s case will not apply where a document on which the person seeks to rely on is a forgery.
Case Law: Ruben vs. Great Fungall Consolidated Co. (1906)
Ruben lent a company a sum of money on the security of a share certificate. The secretary had forged the signatures of the two directors and had affixed the seal on the certificate without authority. The company refused to register the share certificate. Ruben claimed damages relying on the Turquand’s rule.
It was held that he could not do so because the rule did not apply where the document was forged.
(d) Acts outside the apparent authority: - The rule in Turquand does not apply where a person acting on behalf of the company exceeds any actual or ostensible authority given to him. A person who enters into a transaction with a company official who has acted beyond official powers will not be protected by the rule in Turquand case.
Case Law: Anand Lal vs. Dinshaw & Co. (1942)
P accepted a transfer of company’s property from its accountant. Since such transaction is apparently beyond the scope of the accountant’s authority it was void.
(e) No knowledge of the contents of the articles and memorandum of association: -
A person who has not actually read the memorandum and articles and who was not at the time he entered into the contract, aware of their content cannot seek to rely on the doctrine of indoor management.
The doctrine of indoor management is based on the principle of estoppels and therefore cannot be invoked in favor of a person who has not consulted the company’s memorandum and articles.
No one can rely and act upon something of which he was infact completely ignorant.