Doctrine of Indoor Management: A Report On

A REPORT ON
Doctrine of Indoor Management
In the partial fulfilment of

Post Graduated in Diploma Management
Calcutta Business School
Term 2
For Legal Aspects Of Business & CSR
Submitted by
Harsh Bansal (17008)
Submitted To
Prof. C.S (Dr) Santanu Mitra
Adjunct Professor
Submission Date:
12-11-2017
CONTENTS
Serial Particulars Page

no. no.
1 Acknowledgement 1
2 Introduction 2
3 Origin of doctrine 2
4 Exception to doctrine of indoor management 3-4
5 Conclusion 5
6 Bibliography 6
Acknowledgement
On the very outset of this report, I would like to extend my sincere and heartfelt
obligation towards all the personages who have helped me in this endeavour.
Without their active guidance, help and cooperation & encouragement, I
would not have made headway in the project.
I take this opportunity to express my profound gratitude and deep regards to

our Prof. CS (Dr.) Santanu Mitra for his exemplary guidance, monitoring and
constant encouragement throughout the course of this project.
I am ineffably indebted to our Director Dr. Shekhar Chaudhari , Principal Dr.

Tamal Dutta Choudhuri for conscientious guidance and encouragement to
accomplish this assignment.
I also acknowledge with a deep sense of reverence, gratitude towards my

parents who has supported me morally and keeping faith in me.
Lastly, gratitude goes to all of my friends who directly or indirectly helped me to

complete this project report.
INTRODUCTION
The doctrine of indoor management was evolved 150 years ago. It is also known
as Turquands rule. It is followed from doctrine of constructive notice-protects
company against outsiders whereas the doctrine of indoor management
protects outsiders against the actions of company. This doctrine also is a possible
safeguard against the possibility of abusing the doctrine of constructive notice.
ORIGIN OF THE DOCTRINE
This doctrine was laid down in the case of Royal British Bank V. Turquand,
The directors of the company borrowed some money from the plaintiff. The
article of company provides for the borrowing of money on bonds but there was
a necessary condition that a resolution should be passed in general meeting.
Now in this case shareholders claims that as there was no such resolution passed
in general meeting so company is not bound to pay the money. It was held
that the company is bound to pay back the loan. As directors could borrow but
subjected to the resolution, so 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 entitles to assume that the necessary resolution had been passed. Lord
Hatherly observed- Outsiders are bound to know the external position of the
company, but are not bound to know its indoor management.
Sections 290 provides for the validity of acts of directors- acts done by a person
as a director shall be valid, notwithstanding that it may afterwards be
discovered that his appointment was invalid by reason or any defect or
disqualification or had terminated by virtue of any provisions contained in this
act or in the articles:
Provided that nothing in this section shall be deemed to give validity to acts
done by a director after his appointment has been shown in the company to be
invalid or to have terminated
The object of the section is to protect persons dealing with the company
outsiders as well as members by providing that the acts of a person acting as
director will be treated as valid although it may afterward be discovered that his
appointment was invalid or that it had terminated under any provision of this act
or the articles of the company.
Establishment of the doctrine
The rule was not accepted as being firmly well established in law until it was
approved by the House of Lords in Mahoney v East Holyford Mining Co. In this
case, it was contained in the companys article that a cheque should be signed
by 2 of the 3 directors and also by the secretary. But in this case the director who
signed the cheque was not properly appointed. The court said that
that whether 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 properly appointed, and cash
cheques.
EXCEPTIONS TO DOCTRINE OF INDOOR MANAGEMENT
1. 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 Turquands
case. A person who has actual knowledge of the internal irregularity cannot
claim the protection of this rule, because he could have taken steps for self-
protection. A person who himself is a party to the inside procedure, such as a
director is deemed to know the irregularities, if any. In the case of T.R Pratt
(Bombay) Ltd. V. E.D. Sassoon & Co. Ltd. - Company A lent money to Company
B on a mortgage of its assets. The procedure laid down in the articles for such
transactions was not complied with. The directors of the two companies were
the same. Held, the lender had notice of the irregularity and hence the
mortgage was not binding.
2. Negligence on the part of the outsider: 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.
3. Forgery: The rule in Turquands case will not apply where a document on which
the person seeks to rely on is a forgery. In the case of Ruben vs. Great Fingall Ltd
(1906) Lord Loreburn observed that: It is quite true that persons dealing with
limited liability Co.s are not bound to inquire into their indoor mgt. & will not be
affected by irregularities of which they have no notice. But this doctrine, which is
well established, applies only to irregularities that otherwise might affect a
genuine transaction. It cant apply to a forgery. In the case of Official
Liquidator v. Commr of Police, the Madras High Court held the company liable
where the Managing Director had forged the signature of two other directors.
See the case of Anand Bihari Lal vs. Dinshaw & Co.
4. No knowledge of Articles: 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 companys memorandum and articles. No one can rely and act
upon something of which he was infact completely ignorant. A person who
does not have actual knowledge of the companys articles cannot claim as
against the company that he was entitled to assume that a power which could
have been delegated to the directors was in fact so delegated. In Rama
Corporation v. Proved Tin and General Investment Co, the plaintiffs contracted
with the defendant co and gave a cheque under the contract. The director
could have been authorized but in fact, was not. The plaintiffs had not read the
articles. The director misappropriated the cheques and plaintiff sued. Held,
director not liable as it was outside his authority.
5. Acts outside 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. In the case of Anand Lal vs. Dinshaw & Co. (1942) Plaintiff
accepted a transfer of companys property from its accountant. Since such
transaction is apparently beyond the scope of the accountants authority it was
void.
Conclusion
The doctrine of constructive notice expects each and every outsider not only to
know the documents of the company but also presumes to understand the
exact nature of documents, which is practically not possible, and thus, in my
opinion, is a little unfavourable to the outsiders dealing with the company.
However, in reality, the company is not known by the documents but by the
people who represent it and deal with an outsider. Those who enter into
contracts with the company usually do so, on the basis of goodwill and
reputation of the persons representing the company rather than the documents
of the company.
Hence, the courts have evolved the doctrine of indoor management as an

opposite to the doctrine of constructive notice in order to protect the interests of
the outsiders. In my opinion, the doctrine of indoor management is absolutely
necessary for protecting the outsiders and forcing the company to fulfil their
part of obligation in genuine transactions. This also needs to be implemented
subject to certain exceptions and the same have been evolved by the courts.
Bibliography
A handbook on Law, Ethics and communication for CA IPCC by CA
Munish Bhandari.
Company Law 2013 IPCC by ICAI.
Company Law Executive Programme by ICSI.
https://www.lawnotes.in/Doctrine_of_Indoor_Management

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A REPORT ON

Doctrine of Indoor Management

In the partial fulfilment of

Calcutta Business School

Serial Particulars Page

4 Exception to doctrine of indoor management 3-4

I take this opportunity to express my profound gratitude and deep regards to

I am ineffably indebted to our Director Dr. Shekhar Chaudhari , Principal Dr.

I also acknowledge with a deep sense of reverence, gratitude towards my

Lastly, gratitude goes to all of my friends who directly or indirectly helped me to

ORIGIN OF THE DOCTRINE

Establishment of the doctrine

EXCEPTIONS TO DOCTRINE OF INDOOR MANAGEMENT

4. No knowledge of Articles: A person who has not actually read the

Hence, the courts have evolved the doctrine of indoor management as an

Company Law 2013 IPCC by ICAI.

Company Law Executive Programme by ICSI.

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