To understand the doctrine of Indoor Management, we first need to understand the doctrine of constructive notice.
Doctrine of Constructive Notice
The Memorandum and Articles of Association on their registration with the Registrar become public documents and are available for inspection by electronic means on payment of prescribed fee [Section 399 of The Companies Act, 2013]
Hence, every person dealing with the company is presumed to have knowledge of the contents of these documents and also to have understood them according to their proper meaning. This type of presumed knowledge of these documents is termed as ‘Constructive Notice’ of Memorandum and Articles of Association
Accordingly, if a person supplies goods to a company in which it cannot deal according to objects clause, he will not be able to recover the price from the company. Supplier cannot plead that he did not have knowledge of the contents of MOA of the company. Therefore, if a person enters into a contract which is ultra vires the company, he must do so at his peril. The doctrine of constructive notice is not a positive one but a negative one. It operates against the person who has been dealing with the company but not against the company itself.
The doctrine of constructive notice protects the company and not the outsiders. Thus, this doctrine is a ‘Cloud’ for the strangers.
Doctrine of Indoor Management
The doctrine of indoor management is an exception to the doctrine of constructive notice since by no means outsiders can be deemed to have notice of the internal affairs of the company.
This doctrine protects the outsiders against the company by entitling them to assume that if an act is authorized by the MOA or AOA, all the detailed formalities for doing the act have been observed. Stakeholders need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the company had gone through all these proceedings in a regular manner.
An outsider is presumed to know the constitution of a company but not what is going on behind the doors closed to him. People are entitled to presume that internal proceedings are as per documents submitted with the Registrar of Companies.
If the contract is within the powers of the company, then the company will be bound to the outsider and will not be allowed to escape the liability by showing that there was some irregularity in following the procedure.
This doctrine is based on the principles of justice and public convenience.
Refer Case Law: Royal British Bank v Turquand
In, Royal British Bank vs Turquand, Mr. Turquand was the official manager (liquidator) of the insolvent Cameron’s Coalbrook Steam, Coal and Swansea and Loughor Railway Company. The company had given a bond for £ 2,000 to the Royal British Bank, which secured the company’s drawings on its current account. The bond was under the company’s seal, signed by two directors and the secretary. When the company was sued, it alleged that under its registered deed of settlement (the articles of association), directors only had power to borrow up to an amount authorized by a company resolution. An ordinary resolution had been passed but it did not specify how much the directors could borrow.
Judgement It was held that the bond was valid, so the Royal British Bank could enforce the terms of the bond. Since the Articles of association were registered, there was constructive notice and so the bank was deemed to be aware that the directors could borrow only up to the amount the resolutions allowed. But the bank could not be deemed to know about which ordinary resolutions were passed, because these were not registered. The bond was valid, because there was no requirement to look into the company’s internal workings. This is the ‘indoor management rule’, that the company’s indoor affairs are the company’s problem.
Exceptions to the doctrine of indoor management
1) Knowledge of irregularity
- When the person dealing with the company has notice, whether actual or constructive, of the internal irregularity, he cannot claim protection provided by this doctrine.
- Knowledge of an irregularity may arise from the fact that the person contracting was himself a party to the inside procedure.
2) Suspicion of irregularity
- The doctrine of indoor management does not reward those who behave negligently.
- Where the transaction is unusual or not in the ordinary course of business, the person dealing with the company cannot claim protection under this doctrine since he could have discovered the irregularity if he had made proper inquires.
3) Forgery
- A person dealing with the company cannot claim protection under this doctrine where forgery is involved.
- Transactions effected by forgery are void-ab-initio.
- A company cannot be held liable for forgeries committed by its officers.
This article is an extract from the book (https://capreetiaggarwal.com/) authored by CA Preeti Aggarwal.
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