Doctrine of Indoor Management: Meaning, Exceptions and FAQs

The Doctrine of Indoor Management comes under the ambit of the Companies Act, 2013 and it protects the rights of any person who is performing any kind of transaction or business with the company. Section 2(20) of the Act explains the meaning of the Company as the association of persons according to the laws of the Companies Act, 2013. The Doctrine of Indoor Management protects outsiders against the actions done by the company. Any person entering into a contract must ensure that the transaction is authorized by the articles and memorandum of the company.

Key Takeaways:

• The act provides the company the status of an artificial person who can perform all the transactions in their name.
• The Memorandum of Association and Article of Association are the two important documents of a company that provide the scope of services of the company and the functioning of its internal team.
• These documents are essential for the smooth functioning of a company. When the company gets registered with the registrar, these documents become publicly available to the general public.

What is Doctrine of Constructive Notice?

It is the responsibility of the person/organization who is entering into any agreement with another company to examine the publicly available documents of these companies and only enter into the contract if they are doing business as per these documents. It is presumed that all the people must have read these publicly available documents and this presumed notice is known as Doctrine of Constructive Notice. If the agreement the companies are going to enter is not in conformity with the Memorandum or Article of Association, then it is the responsibility of the partner not to enter into any business with them. It is established by various judgments that anyone who agrees with the company must not only read the Article of Association and Memorandum of Association but understand them in their plain and basic nature.

The case Kotla Venkataswamy vs Chinta Ramamurthy perfectly explains the Doctrine of Constructive Notice. In this case, the Article of Association of the company mentions that the company can only execute any agreement if it has the signature of 3 members: the Managing director, the Secretary, and the working director. The plaintiff in this case executed an agreement in which only two of them have signed. The court in this case ordered that the agreement is not valid as per the law because the plaintiff must go through the Article of Association of the company before entering into any agreement with them.

What is Doctrine of Indoor Management?

The Doctrine of Indoor Management is quite the opposite of the Doctrine of Constructive Notice. The Doctrine of Constructive Notice protects the company from the people who want to have business with them but the Doctrine of Indoor Management protects the people who want to have any association with the company. This doctrine states that the people must know all the publically available documents of the company before entering into any kind of association with them but if they are doing association by these documents then the company will be made liable if they are not following the directions given in those documents. The internal mechanism of the company is not available to the general public; hence, if they are acting in good faith as per the publically available documents, then the company will be liable.

The case Royal British Bank vs Turquand lays the foundation of this doctrine. The Doctrine of Indoor Management only emerged after this case. In this case, the directors of the company have taken a loan from a bank. The shareholders of the company have raised an obligation when they have to repay the loan amount. They told the court that the directors of the company had never been authorized to take a loan for the company. However, the articles of the company authorize the directors they take a loan after passing a “Board Resolution” for the same. So the company has to return the loan because the bank must have thought that the directors will only take the loan from the bank after passing the required resolution. The company must follow the rules of the articles and even if they don’t follow they are bound by it. The bank must have acted in good faith and given them the loan. Also, the bank does not have the authority to check whether the company has passed the specified resolution or not as these documents are confidential documents of the company.

Exceptions to Doctrine of Indoor Management

The Doctrine of Indoor Management is very old and economic transactions are growing enormously in every sector. So there are also some exception to this rule that helps the companies in some situation.

1. Knowledge of Irregularity

The Doctrine of Indoor Management is not applicable in cases where the parties to the agreement have the knowledge of irregularity and still choose to enter into the agreement. In this case, the parties can choose not to enter into any type of relationship with the company, still, they choose the same and cannot take the benefit of this doctrine. In the case, Devi Ditta Mal vs Standard Bank of India, two directors were involved in the transfer of a share, and one of the directors knew that the transfer was not valid. One of the directors in this case was not appointed as per the laws of the company and the other director was involved in the transfer of shares directly. The articles of the company restrict that the director choose to move forward with the transaction hence he cannot take the defence of the Doctrine of Indoor Management in this case.

2. Suspicion of Irregularity

In the case of suspicion, the Doctrine of Indoor Management is not applicable. It means that if the parties entering into the contract did not make proper inquiry about the company or the means of business they are doing then they cannot take the defence of the doctrine. If the irregularity can be found by the parties by mere inquiry, then it is the responsibility of the party to perform such inquiry and then only enter into the agreement. It is the responsibility of the person entering into the agreement to perform their due diligence before entering into any such agreement.

3. Forgery

If in any transaction of business, the parties are involved in any type of forgery then they cannot take exception to this doctrine. If the representative of the company has forged any document and based on that document, he has made any transaction then the other person cannot take the defense of this doctrine as the company cannot be held liable in this case. The company in the case does not know about the transaction so it is wrong as per the general law if we are making them liable for the act that is done by the member of the company without their actual knowledge.

4. Acts outside Apparent Authority

If the member of the company acts beyond the scope that is provided to him/her in the articles of the company, then in that case the other party cannot take the benefit of this doctrine. In this case, the article of the company does not allow the person to perform such a task then the other party cannot take the remedy of this doctrine. The plaintiff can only make the company liable when the member who has done the transaction has some power delegated to him by the articles of the company.

5. Representation through Articles

This exception to the Doctrine of Indoor Management is very confusing. If the articles of the company have delegated some powers to any member and they did not pass any board resolution for the same, then also it is correct to believe that such power can be delegated. The company in this case cannot take the defence that there was no board resolution for delegating the power. If the articles of the company are giving the power then it is assumed that the company must have acted in the way that delegated the power to the concerned person.

Conclusion

The Doctrine of Indoor Management and constructive notice are very old doctrines and it is adopted in society to protect the company and the people who want to do business with the company. The Doctrine of Indoor Management provides the people the benefit that they do not have to enquire or know about the internal procedures of any company to enter into an agreement with them. If they are bound by the articles of the company, then they can enter into an agreement with them.

Doctrine of Indoor Management- FAQs

Where a person can get the Memorandum and Article of Association of a company?

Any person can get the Memorandum and Article of association of any company by giving the required fee to the registrar of the company where the company is registered. They can also get the same online on the MCA website.

Is the Doctrine of Constructive Notice applicable in India?

Yes, the Doctrine of Constructive Notice is applicable in India. The Indian judiciary has provided us with various landmark judgments in which it is established that this doctrine is applicable in India.

Is the Doctrine of Indoor Management applicable in India?

Yes, the Doctrine of Indoor Management is applicable in India.

Is the Doctrine of Indoor Management present in the Companies Act, 2013?

No, the Doctrine of Indoor Management is not present in the Companies Act, 2013 but the court has accepted the doctrine in various situations.

Why the Doctrine of Indoor Management is also known as the Turquand Rule?

The Doctrine of Indoor Management is also known as the Turquand Rule because the doctrine originated in the case of Royal British Bank vs Turquand.

Reference:

• National Law University, Odisha

Note: The information provided is sourced from various websites and collected data; if discrepancies are identified, kindly reach out to us through comments for prompt correction.