Chapter: 7.3 Doctrine of Indoor Management

Doctrine of Indoor Management:

The rule of constructive notice does not imply that a third party dealing with the company is bound to ensure that all the internal regulation of the company have been complied by the officials of the company. An outsider dealing with the company cannot access each and every document and verify the compliance as the details of internal procedure are not open to public inspection unlike the memorandum of association or articles of association. Thus, an outsider is presumed to know the constitution of the company and not the internal proceedings. Therefore, according to the rule of indoor management, any outsider dealing with the company may safely presume that the internal proceedings have been fully complied with. Thus' the doctrine of indoor management is an exception to the rule of constructive notice. The rule of "Indoor Management" protects the outsider against the company whereas the constructive notice protects the company against the outsider.

Royal British Bank V/s Turquand

The directors of a company borrowed a sum of money from the Plaintiff. The company's article provided that the directors might borrow on bonds such sums as may from time to time be authorised by a resolution passed at a general meeting of the company. The shareholders claimed that there had been no such resolution authorizing the loan and therefore, it was taken without their authority. The company was however, held bound by the loan. The plaintiff i.e. the lender bank is not bound to inquire into whether the requisite resolution has been passed by the shareholders or not. The bank could well assume that the resolution has been passed. This is known as Turquand Rule.

Exceptions to the Turquand Rule:
1.    Knowledge of Irregularity: The person already aware of the irregularity cannot claim protection under this rule.
2.    Circumstances inviting inquiry: Where a person dealing with the company could have discovered the irregularity but he did not do so, such person cannot seek the benefit of this rule.
3.    Acts void ab-initio and Forgery: The forge certificate is pure nullity. The doctrine applies to irregularities that might affect genuine transactions but rule cannot apply to a forgery.
4.    Knowledge of Articles: Turquand Rule does not apply when the person seeking protection under indoor management is aware of the contents of the articles.
5.    Act outside the scope of apparent authority: Where the act of the officer does not fall within the apparent authority of such an officer, protection under this doctrine cannot be sought.