written by | April 26, 2022

Meaning and Importance of Doctrine of Indoor Management

The doctrine of indoor management offers protection to all external members of the public when the Directors of an organisation abuse their seat of authority and indulge in the wrong usage of the powers they enjoy. This doctrine emphasises that people should consider all internal activities and operations in sync with the relevant documents presented to the Registrar of Companies.

This is also referred to as the Articles of Association by most individuals. In simple words, outsiders who enter into any transaction with an organisation believe that everything inside the organisation is functioning smoothly even if the case may be otherwise. Such outsiders need to be well-acquainted with the Memorandum of Association of the organisation. This will enable them to apply for and demand compensation in the case of any irregularities in the organisation's functioning whenever such a situation arises.

Did you know?

The doctrine of indoor management was conceptualised almost 150 years ago to protect external members from the misuse of authoritative actions of the organisation

The Doctrine of Constructive Notice

The constructive notice directly acknowledges that you know some specific facts. It furnishes the organisation with security in its transactions with outsiders. According to the doctrine defined in the 2013 Companies Act, as soon as an organisation gets registered, some of its documents are presented in the public domain. Therefore, assuming that if you, as an outsider, enter into any transaction with the organisation, you are already familiar with all its regulations. This doctrine puts the entire onus on you of understanding the internal functioning of the organisation. If you plan to transact a deal with the organisation, you should scrutinise the documents minutely. You have to figure out that the contract you wish to enter with the organisation conforms to its internal set of norms. It takes for granted that you are well-versed with the facts of the organisation's authorities and the powers vested in them. This could have severe repercussions for the outsiders. To reduce this burden on external individuals, the courts established the doctrine of indoor management, which is popularly also referred to as Turquand's rule.

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What is Doctrine of Indoor Management?

The Turquand rule is another name for the doctrine of indoor management. This doctrine permits outsiders to transact with an organisation flawlessly by placing implicit trust in the said doctrine. We can trace the doctrine's origin to the case between the Royal British Bank and Turquand in the year 1856. Following are some of the activities which led to the establishment of this doctrine:

The Directors of an organisation borrowed a fixed amount of revenue organisation on bonds. The Royal British Bank (plaintiff) lent the amount to the directors. This is permissible only after you pass a resolution for the same at a general meeting of the concerned organisation. The bank granted the loan, but the directors did not repay it. The organisation was held responsible for this glaring error. The respective shareholders in the organisation stated that the money lent to the directors was without seeking their permission. When the matter went to court, the court stated the appraisement that all external members knew about the external proceedings of an organisation and not the indoor management. Two sets of documents made available to the external members or public are the articles of association and the Memorandum of Association. In India, you can trace the origins to Section 290 of the 1956 Indian Companies Act.

Exceptions to the Doctrine of Indoor Management

The doctrine of indoor management does not apply to several situations. Some of these include:

Knowledge of Irregularity

The doctrine has no bearing in the case of individuals who are aware of wrongdoings within the organisation. If you are aware of internal misdeeds and still enter into a contract, the doctrine will not protect you. If you are aware of some wrong transactions executed by some directors or a single director, and you still go ahead with the contract, you will not be protected from the outcomes.

Ignorance of the Articles and Memorandum of Association

If you depend on the organisation for being ignorant about the details laid down in the Memorandum of Association and the Articles of Association, the doctrine will not protect you. 

Outsider Behaves Carelessly

If an officer with whom you are dealing regarding the contract behaves very suspiciously and you do not report him, the doctrine will not protect you.

Forgery

If you enter into a contract with forged documents, the doctrine will not protect you, and the organisation will not be responsible for the outcome.

Actions Of Officers Which Are Beyond His Stated Powers:

If officers indulge in activities beyond the authority vested in them, you will not be able to claim protection from the organisation.

Examples of Doctrine of Indoor Management

There have been numerous cases about the doctrine of indoor management. Some of these are listed below:

Sri Krishna versus Mondal Bros & Co

Under the Memorandum of Association and Articles of Association, a manager in an organisation has the authority to borrow a specific amount of money. Manager XYZ borrowed a certain amount on a Hundi. However, the manager didn't place the same in the strongbox of the organisation. When the matter reached the court, the court stated that the organisation had to acknowledge the Hundi. The court stated this because the lender of the money had a bona fide claim whereby they could not recover the money based on acts that are considered fraudulent and entered into by the concerned personnel of the organisation.

Anand Behari Lal versus Dinshaw & Co

In the history of property matters, no organisation authorises its accountant to enable a transfer of the properties owned by the organisation. In this case, the organisation's accountant did just that. A plaintiff accepted this, and the organisation denied protection for his gross carelessness. The transaction was considered a void transaction.

Ruben versus Great Fingall Consolidated Limited – 1906

In this case, the Company Secretary forged the signatures of two organisation directors. The plaintiff bought the shares with the forged signatures on the documents on the premise that, ultimately, the organisation will be liable for whatever transpires. This was a sheer case of forgery, and the Company Secretary indulged in the act of fraud. The organisation was not liable for anything, and the person who held the shares certificate did not benefit from any protection.

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Lakshmi Ratan Cotton Mills versus J.K Jute Mills Company

The Articles of Association permitted the organisation's directors to borrow funds, and their directors could also entrust this same authority to other directors. Director X decided to take a specific amount of money from the organisation's plaintiff. They did this without passing a resolution to state that director X had been vested with the power to borrow money. However, according to the Articles of Association, the organisation was bound by the amount given to director X as it had given such authority to the director. The director was also entitled to delegate the same authority to another of his status.

Conclusion

The above examples clearly state how the doctrine of indoor management can protect in some situations and is not liable to provide the same in some other cases. This doctrine was established to counter the doctrine of constructive notice as the latter impacted the outside members harshly. The doctrine does not spare government authorities, and it effectively protects society from all organisation authorities who indulge in misusing the seat they occupy. 

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FAQs

Q: Is forgery one of the exceptions to the doctrine of indoor management?

Ans:

Yes. Forgery is one of the exceptions to the doctrine of indoor management, among many others.

Q: How do you define the doctrine of indoor management?

Ans:

This doctrine protects all outsiders from all the wrongdoings conducted by organisations with which they transact.

Q: What is the Turquand rule?

Ans:

This rule offers protection to all third parties who do not inquire into an organisation's functioning based on good faith. It protects such individuals when organisations do not function by their internal rules and regulations.

Q: What is the doctrine of constructive notice?

Ans:

This doctrine assumes that individuals are already familiar with specific facts because it is mandatory for them to investigate before entering into a transaction that showcases irregularities.

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