Doctrine of Indoor Management /Rule of Turquand

The doctrine of constructive notice throws a burden on people entering into contracts with the company that they are presumed to have read the documents, though in fact, they might not have read them. On the other hand, the doctrine of indoor management allows all those who deal with the company to assume that the provisions of the articles have been observed by the officers of the company. In other words, they are not bound to enquire into the regularity of internal proceedings. An outsider is not expected to see that the company carries out its internal regulations.

CASE: The directors of a company were authorised by the articles to borrow on bond such sums of money as should from time to time, by a resolution of the company in general meeting, be authorised to be borrowed. The directors gave a bond to T without the authority of any such resolution. The question arose whether the company was liable on the bond.

Held: The company was liable on the bond, as T was entitled to assume that the resolution of the company in general meeting had been passed [The Royal British Bank v. Turquand (1856) 6 E &B 327].

Exceptions: The doctrine of indoor management is subject to the following exceptions:

1. Knowledge of Irregularity: The rule does not protect any person who has actual or constructive notice of the want of authority of the person acting on behalf of the company.

• CASE: The articles of a company empowered the directors to borrow up to 1,000. They could exceed the limit of 1,000 with the consent of the company in general meeting. Without such consent, they borrowed 3,500 from themselves and took debentures. The company refused to pay the amount.

Held: Their debentures were good to the extent of 1,000 only as they had notice of the internal irregularity [Howard v. Patent Ivory Co., (38 Ch. D. 156)].

2. No Knowledge of Articles: 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

• CASE: 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 provide that the Directors could delegate their powers to one of them. But Rama Corporation never read the articles. Later, it was found that the directors of the company did not delegate their powers to T. Plaintiffs relied on the rule of Indoor Management.

Held: They could not, because they did not know the existence of the power to delegate. [Rama Corporation v. Proved Tin and General Investment Co. (1952) 1 All ER 554].

3. Void or illegal transaction: The rule does not apply to transactions which are void or illegal ab initio, e.g., forgery.

• CASE: The secretary of a company forged signature of two of the directors required under the articles on a share certificate and issued the certificate without authority. The applicants claimed to be entitled to be registered as members of the company.

• Held: The certificate was a nullity and the holder of the share certificate could not take advantage of the doctrine of indoor management [Ruben v. Great Fingal Consolidated (1906) A.C 439].

4. Negligence: If an officer of a company does something which would not ordinarily be within his powers, the person dealing with him must make proper enquiries and satisfy himself as to the officer’s authority. If he fails to make inquiry, he cannot rely on the rule.

• CASE: A person who was sole director and principal shareholder of a company paid into his own account cheques drawn in favour of the company. The bank should have made enquiries as to the power of the director. The bank was put upon inquiry and was accordingly, not entitled to rely upon the ostensible authority of director [A. L. Underwood v. BanKof Liverpool (1924) 1 K. B. 775].