DOCTRINE OF INDOOR MANAGEMENT
The doctrine of indoor management, also referred to as Turquand 's rule evolved 150 years ago. This Theory has come into play as an alternative to the Theory of Constructive Notice. On one hand, where the Doctrine of Constructive Notice is intended to protect the organization from competitors, the Doctrine of Indoor Management was designed to prevent third parties, or even competitors, from the actions of the company. In other words, the Indoor Management Doctrine notes that the individuals associated with the business do not need to examine the internal procedures relating to the contract if they are confident that the agreement complies with the Memorandum and the Articles of Association.
It’s Origin:
The doctrine of Indoor management was originated in the case of Royal British Tank v. Turquand.
Facts: The defendant borrowed a certain sum of money from the plaintiff. The Company's Article called for the borrowing of money on bonds with a clause added to it that a resolution would be passed in the General Assembly. But the Shareholder’s stated that such resolution wasn’t passed by the members in the meeting and hence they are not liable for the losses or to pay the money.
Judgement:
It was held that the company would be liable to pay the amount. The directors were permitted to borrow the amount only after the resolution was passed at the General Meeting, so the complainant had the authority to infer that the regulations had been completed and the resolution had been adopted. Thus, Turquand had the right to sue the Company on the strength of the bond. In his judgment, Lord Hatherly sated- "Outsiders are bound to know the company's external position, but are not bound to know its indoor management."
Section 290 of the Companies Act, 1956 states that “Validity of acts of directors. Acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid because of any defect or disqualification or had terminated by any provision contained in this Act or the articles: Provided that nothing in this section shall be deemed to give validity to acts done by a director after his appointment has been shown to the company to be invalid or to have terminated. Board' s powers and restrictions thereon”
Establishment of the Doctrine:
The doctrine of Indoor Management was established in the case of Mahoney v. East Holyford Mining Co.
Facts: The Article of the company stated that the cheque issued by the company must be signed by two or three directors and the secretary. But the issue here was the cheque issued to the party was signed by the director who wasn’t properly appointed at the time of signing the cheque.
Judgement: the court held that the appointment of the director comes under the Internal Management of the company. The party claiming amount will be entitled to receive the amount through cheque as he will presume that directors were duly appointed.