Doctrine of Indoor Management

Introduction:             The role of doctrine of indoor management is opposed to that of the rule of constructive notice.  The latter seeks to protect the company against the outsider; the former operates to protect outsiders against the company.

The 'doctrine of indoor management' allows all those who deal with the company to assume that the officers of the company have observed the provisions of the articles.  In other words, the persons dealing with the company are not bound to inquire into the regularity of internal proceedings.

The rule had its genesis in Royal British Bank V. Tarquand.

The directors of a company borrowed a sum of money from the plaintiff.  The company's articles provided that the directors might borrow on bonds such sums as may from time to time be authorized 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.  Once it was found that the directors could borrow subject to a resolution, the plaintiff had the right to infer that the necessary resolution must have been passed.

The rule is based upon obvious reasons of convenience in business relations.  The memorandum and articles of association are public documents, open to public inspection.  But the details of internal procedure are not thus open to public inspection.  Hence, an outsider "is presumed to know the constitution of a company but not what may or may not have taken place within the doors that are closed to him".

Exceptions:

1. Where the outsider had knowledge of irregularity – The rule does not protect any person who has actual or even an implied notice of the lack of authority of the person acting on behalf of the company. Thus, a person knowing fully well that the directors do not have the authority to make the transaction but still enters into it cannot seek protection under the rule of indoor management.  In Devi Datta Mal V. Std Bank of India (1927) 101 IC 568, a transfer of shares was approved by two directors, one of whom within the knowledge of the transfer was disqualified by reason of being the transferee himself and the other was never validly appointed, the transfer was held to be ineffective.
2. No Knowledge of articles – Again, the rule cannot be invoked in favour of a person who did not consult the memorandum and articles and thus did not rely on them. In Rama Corporation v. Roved Tin & General Investment Co. (1952) All, ER 554, T was a director in the investment company.  He purporting to act on behalf of the company, entered into a contract with the Rama Corporation and took a cheque from the latter. The articles of the company did not provide that the directors could delegate their powers to one of them. But Rama Corp. people had never read the articles.  Later, it was found that the directors of the company did not delegate their powers to T Plaintiff relied on the rule of indoor management.  Held, they could not, because they even did not know that power could be delegated.
3. Forgery – The rule of indoor management doesn't extend to transactions involving forgery or otherwise void or illegal ab initio. In the case of forgery it is not that there is absence of free consent but there is no consent at all. The person whose signatures have been forged is not even aware of the transactions, and the question of his consent being free or otherwise does not arise. Since there is no consent at all there is no transaction. Consequently, it is not that the title of the person is defective but there is no title at all. Therefore, howsoever clever the forgery might be, the person gets no rights at all.  Thus, where the secretary of a company forged signatures of two of the directors required under the articles on a share certificate and issued certificate without authority, the applicants were refused registration as members of the company.  The certificate was held to be a nullity and the holder of the certificate was not allowed to take advantage of the doctrine of indoor management – Ruben v. Great Fingal Consolidated (1906) AC 439.

Conclusion:                The role of the doctrine of Indoor Management is opposed to that of the rule of constructive notice.  The latter seeks to protect the company against the outsider, the former operations to protect outsiders against the company. The rule of constructive notice is confined to the external position of the company and therefore, it follows that there is no notice as to how the company's internal machinery is handled by its officers.  If the contract is consistent with the public documents, the person contracting will not be prejudiced ny irregularities that may beset the indoor working of the company.  The rule had its genesis in Royal British Banl V. Turquand.