Doctrine of Indoor Management

What is Doctrine of Indoor Management?

The Doctrine of Indoor Management, or otherwise called as Turquand Rule, wherein the external parties are safeguarded from any irregularities in the internal management of the company. And the outsider dealing with the company is not required to look into the defects in the internal management of the company.

So the company bound to make good the loss suffered by the external party, due to such irregularity, as it does not invalidate the act performed by the company. It is the opposite of the Doctrine of Constructive Notice, which provides protection to the company.

In simple words, the doctrine of indoor management states that the party dealing with the company only need to ensure that the proposed transaction is not contrary to the company’s articles of association and memorandum of association.

Hence, there is no such need to investigate the internal irregularities of the company but, if there exists any irregularity, the company will be held liable for the same, as the party acted in good faith and he was not aware of the internal affairs of the company.

Royal British Bank Vs Turquand Case

The origin of the Doctrine of Indoor Management is due to the Royal British Bank Vs Turquand Case, in the year 1856.

The Turquand company’s articles of association state that money borrowed on bonds requires passing a resolution at the General Meeting of the Company.

The directors of the company borrowed a loan from Royal British Bank, but the loan is not approved by the shareholders as they did not pass the resolution at the General Meeting.

Further, the company failed to repay the loan, for which the company is held liable and the shareholders of the company denied to accept the claim, as no resolution is passed by the company.

Therefore, the company is held liable for the transaction, as the party entering into the contract with the company, is entitled to believe that all the relevant provision relating to the company’s internal management are duly complied with.

House of Lords in Mahony Vs East Holyford Mining Co

In the case of the House of Lords in Mahony V East Holyford Mining Co, in the year 1875, the company’s articles of association state that the company’s cheques should be signed by two directors and countersigned by the company secretary. Afterwards, it has been disclosed that the appointment of the directors and secretary who signed the cheque was not performed in the prescribed manner.

So, the court held that the person who received the cheques has the right to receive the amount, as the appointment of the directors of the company, belongs to the internal management of the company. Hence, the party dealing with the company is not required to inspect the same.

Exceptions to the Doctrine of Indoor Management

The rule will not apply in the following cases:

  • Knowledge of Irregularity: When the external party dealing with the company is aware of the internal irregularity of the company, then in such a case the doctrine is not applicable.
  • Suspicion of Irregularity: Suppose the party entering into the contract with the company, is dubious of the circumstances, with respect to the contract, then he/she must investigate the same, and if the party fails to do so, then also the rule will not apply.
  • Forgery: The doctrine is not applicable when the party relying on one document come out as forged. Contracts that are associated with forgery are void from the very beginning, as there is no consent of the party and it cannot be validated. So, in the case of forgery company cannot be held liable for the actions performed by its officers.
  • Negligence: If one can discover the internal irregularities of the company with minimum efforts, then also the benefit of the doctrine cannot be available to the external party.
  • No knowledge of Memorandum and Articles of Association: External party can also take the recourse of the fact that they are not aware of the provisions of the memorandum of association and articles of association of the company.

Wrap Up

The protection of the Doctrine of Indoor Management can be tapped when the circumstances revolving around the contract are such that they invite enquiry, but the external party dealing with the company does not inquire about the irregularities.

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