The Doctrine of Indoor Management

In this blog post, I will explain the doctrine of indoor management according to the Indian Companies Act, 2013 with references to case law and relevant sections. I will also explain the legal terms related to this doctrine.

The doctrine of indoor management is a legal principle that protects outsiders who deal with a company from the internal irregularities of the company. It is also known as the Turquand rule, after the landmark case of Royal British Bank v Turquand (1856) 6 E&B 327. According to this doctrine, an outsider who enters into a contract with a company can assume that all the internal formalities and procedures have been duly complied with by the company, as long as the contract is within the scope of the company's memorandum and articles of association. The outsider does not need to inquire into the internal affairs of the company or verify whether the directors or other officers have acted within their authority.

The doctrine of indoor management is an exception to the doctrine of constructive notice, which presumes that every person who deals with a company has knowledge of the contents of the company's public documents, such as the memorandum and articles of association, filed with the Registrar of Companies. The doctrine of constructive notice prevents a person from claiming ignorance of any limitation or restriction on the powers of the company or its directors or officers. However, the doctrine of constructive notice does not allow an outsider to have notice of the internal affairs of the company, which are not disclosed in the public documents. Hence, the doctrine of indoor management comes into play to protect the interests of the outsiders who act in good faith and rely on the apparent authority of the company's representatives.

The doctrine of indoor management is based on the principle of fairness and equity. It prevents a company from taking advantage of its own wrong or negligence and escaping liability towards an innocent third party. It also promotes business convenience and efficiency by reducing the burden on outsiders to investigate every detail of a company's internal management before entering into a contract.

The doctrine of indoor management has been recognised and applied by Indian courts in various cases. For example, in Ramaswami Nadar v Narayana Reddiar AIR 1967 Mad 115, it was held that a person who advanced money to a company on a promissory note signed by two directors was entitled to recover it from the company, even though there was no resolution passed by the board authorising them to sign it. The court applied the doctrine of indoor management and held that the person was not bound to inquire whether such a resolution was passed or not.

However, there are some exceptions to the doctrine of indoor management, where an outsider cannot rely on it and has to make due diligence before dealing with a company. These exceptions are:

- The outsider has actual or constructive knowledge of an irregularity: If an outsider knows or has reason to know that there is some defect or irregularity in the internal management of the company, he cannot invoke the doctrine of indoor management and claim protection. For example, in Anand Bihari Lal v Dinshaw & Co AIR 1942 Oudh 417, it was held that a person who had been a director of a company for several years could not plead ignorance of an irregularity in issuing a cheque by another director without proper authority.

- The outsider behaves negligently: If an outsider acts negligently or carelessly in dealing with a company, he cannot claim protection under the doctrine of indoor management. For example, in Official Liquidator v Raghunath Prasad AIR 1959 All 247, it was held that a person who accepted a transfer deed signed by only one director and one secretary without verifying whether they had authority to do so was negligent and could not enforce it against the company.

- Forgery: If an outsider deals with a forged document or signature purporting to be that of a company or its representative, he cannot claim protection under the doctrine of indoor management. This is because forgery does not create any legal relationship between the parties and cannot confer any rights on anyone. For example, in Ruben v Great Fingall Consolidated Ltd (1906) AC 439, it was held that a person who purchased shares from a person who forged the signatures of two directors on a share certificate could not enforce it against

the company.

Some legal terms related to this doctrine are:

- Memorandum and articles of association: These are two important documents that define the constitution and powers of a company. The memorandum sets out the objects and scope of activities of the company, while the articles lay down the rules and regulations for its internal management and administration. These documents are filed with the Registrar of Companies and are available for public inspection.

- Constructive notice: This is a legal presumption that every person who deals with a company has knowledge of the contents of its public documents, such as the memorandum and articles of association. This presumption prevents a person from claiming ignorance of any limitation or restriction on the powers of the company or its directors or officers.

- Apparent authority: This is a legal concept that allows an outsider to rely on the representation or appearance of authority of a person who acts on behalf of a company, even if that person does not have actual authority to do so. This concept protects the outsider from being held liable for any breach or non-performance of the contract by the company, as long as he acts in good faith and without negligence.