The doctrine of Indoor Management plays an important role in the company. There are two important documents of the company name, Memorandum of Association and Article of Association. Both these documents become public documents after incorporation or registration of the company. Any person can inspect or obtain a copy of them. Persons dealing with the company are required to know about these documents because it is a constructive notice for them. But there is an exception of its Doctrine of Indoor Management of company.
Actually, the doctrine of Indoor Management is different from the doctrine of constructive notice. The doctrine of Constructive notice can be invoked by the company and it does not operate against the company, whereas the doctrine of Indoor Management can be invoked by the person dealing with the company and cannot be invoked by the company. The doctrine of Constructive notice is limited up to outside conditions. It has no relation with the internal activities of the company and there is no constructive notice about it.
What is the Doctrine of Indoor Management?
The doctrine of Indoor Management states that if any contract is in accordance with public documents of the company then there will be no effect, on the person making the contract, of the fact that any irregularities or error was in the indoor Management.
Each person or party transacting with the company is of the opinion that the Indoor activities of management of the company are running smoothly in accordance with article of Association.
For example: If any contract or transaction is made with outside person by the Director on behalf of the company then that contract or transaction will be obligatory to company irrespective of the fact the appointment of directors be faulty, subject to the condition that the persons contracting or transacting is not in know of faulty appointment of director. This is the doctrine of indoor Management. Pandamji and company vs NH.Moose, AIR 1926 Bombay 28.
The doctrine of Indoor Management was first time enunciated in the case of Royal British Bank vs Tarquand 1856. This is the reason that it also called Rule of Tarquand. In this case, the company borrows some money from a Bank and in lieu of that bonds were given to the bank. According to the article of the company, the company may borrow on bonds such sums of money subject to the condition that the company has been authorized by a resolution passed by the general meeting of the company. But in the instant case, the money was borrowed without any resolution and it was stated by the company that he is not bound to pay such debt. The court while rejecting this plea held that the company is liable for payment of debt and said that outsiders are bound to know the external position of the company, but are not bound to know its Indoor Management.
This doctrine is based on just and logic. If any transaction or contract is in consonance with the Memorandum and articles of the company then the person transitioning or contracting had the right to consider that the authorities of the company have followed the provisions of Memorandum and articles. It is not necessary to know by them that the authority who is making a contract or transaction is duly authorized or not that he is not bound to know the Indoor Management and procedures of the company.
In the case of PREMIER INDUSTRIAL BANK LIMITED VS KALORTON MANUFACTURING COMPANY LIMITED 1909, 1 KB 107, it has been held by the court that if according to the articles of company, the directors of company were authorized to do such work which is bounded to company and prior to exercise that right, some preliminary activities are to be fulfilled on behalf of the company then under that circumstance the person executing contract with the directors has no necessity to know that all those activities have been completed, that is he may be considered that whatever be done by the director that was a valid act of them.
In the case of P.V. DAMODARA REDDY VS INDIAN NATIONAL AGENCIES LIMITED, AIR 1946 MADRAS 85, according to the article of a company, the director of company had the power to allot shares only to those embers which were the members of the company at present and they were not having powers to allot shares to outsiders without consent of general meeting of the company.
There are some exceptions to Indoor Management, that is under certain conditions, the doctrine of Indoor Management is not applicable. These circumstances are as follows:
- Knowledge of Irregularity: Having knowledge of irregularity is the first exception of the doctrine .such person who was having knowledge of irregularities of internal management of the company may not get the benefit of this Doctrine. where the party himself participate in the internal activities he can’t take the benefit under the Doctrine of Indoor Management. In the case of Howard vs Patent Ivory Manufacturers Company 1888, 38 Chansari Division 156, debenture shares were are given by the directors themselves .they was supposed to know that the limit up to which there were borrowing money should necessarily be consented by the shareholder which was not obtained .they were in know of this irregularity so they cannot get the benefit of doctrine of indoor management. In the case of Morris vs Kqnssen 1946, a director could not defend and allotment of shares to himself as a participant in the meeting which made the allotment and his appointment as director was also not in order because none of the directors appointing him was validly in office. Thus it is clear that where a person who is himself of part of the internal machinery of a company cannot be allowed to take advantage of irregularity.
- Suspicion of irregularity: The Doctrine of Indoor Management does not apply and is not available wherein the circumstances surrounding the contract it ought to have suspected the irregularity and not made necessary inquiries. The reason is clear that if inquiry made then if irregularity comes in knowledge. In other words, it may be stated that where circumstances are superiors and the enquiry is described but the inquiry is not made intentionally there the benefit of the doctrine of internal management could not be availed. In the case, Anand Bihari Lal vs Dinshaw and Company, AIR 1942 push 417, the plant have accepted a transfer of property of company from its accountant the transfer was held white by the court because he ought to have known that ordinary an accountant does not have authority to affect transfer of companies property in absence of power of attorney. In the case of Haughton & Company vs NothardLowe and Wills limited 1927, A person who was holding directorship of 2 companies agreed to apply money of one company in payment of debt of other company the court propounded that it was something so unusual that the party ought to have a certain whether the person making contract actually held and authority to do so.
- Forgery and Fraud: Where the act is done in the name of the company are void ab initio due to forgery or fraud the benefit of the doctrine of indoor management is not available. In the case of Ruben vs great Fingal limited 1906 AC 439, It has been held that where share certificate is given to the plaintiff by the respondent company having the seal of company and that certificate issued by the security of company but seal and signature both are there the logic of plaintiff that he was part of indoor management of company, therefore, the company should be held liable. Lord Loreburn stated that the Doctrine of Indoor Management cannot be applied in the case of forgery or fraud.
- Ignorance of the Articles of Association: Sometimes the delegation Clause is included in the article of association of company which empowers the board of directors that they may delegate they are the authority to a director. if an outsider acting for transitioning with the company is in known of delegation class then he may assume that the power of delegation has been exercised.But an unusual question arises at that time when an outsider contracting or transitioning with the company is not known of article or Association of company and therefore not knowing about the delegation clause there whether it will be assumed that for which power he was not in know whether it will be exercised?.In the case of British Thomson Houston Company vs Federated European bank limited 1932, it has been held that if a director makes a contract or transaction with an outsider on behalf of the company and that contract or transaction is within the apparent authority then that contract or transaction will be obligatory upon company whether that person was in know or not about the article of association of the company or delegation Claus until it is not proved that the power was not made to make such contract or transaction under the Memorandum of articles of company that is the director was are not authorised to delegate the power to make such contract of transactions.