Explain ‘doctrine of indoor management' in detail.
Answers
Answered by
1
Doctrine of indoor management is an exception to rule of constructive notice. ... According to this doctrine, persons dealing with company are entitled to presume that internal requirements prescribed in the memorandum and articles have been properly observed.
Answered by
2
The doctrine of indoor management was evolved 150 years ago. It is also known as Turquand’s rule. The role of doctrine of indoor management is opposed to of the role of doctrine of constructive notice. The doctrine of constructive notice protects company against outsiders whereas the doctrine of indoor management protects outsiders against the actions of company. This doctrine also is a possible safeguard against the possibility of abusing the doctrine of constructive notice.
The person entering into a transaction with the company only needed to satisfy that his proposed transaction is not inconsistent with the articles and memorandum of the company. He is not bound to see the internal irregularities of the company and if there are any internal irregularities than company will be liable as the person has acted in the good faith and he did not know about the internal arrangement of the company.
The rule is based upon obvious reason of convenience in business relations. Firstly, the articles of association and memorandum are public documents and they are open to public for inspection. Hence an outsider “is presumed to know the constitution of a company, but what may or may not have taken place within the doors that are closed to him.”[1]
ORIGIN OF THE DOCTRINE
This doctrine was laid down in the case of Royal British Bank V. Turquand,[2]
The directors of the company borrowed some money from the plaintiff. The article of company provides for the borrowing of money on bonds but there was a necessary condition that a resolution should be passed in general meeting. Now in this case shareholders claims that as there was no such resolution passed in general meeting so company is not bound to pay the money. It was held that the company is bound to pay back the loan. As directors could borrow but subjected to the resolution, so the plaintiff had the right to infer that the necessary resolution must have been passed.
It was held that Turquand can sue the company on the strength of the bond. As he was entitles to assume that the necessary resolution had been passed. Lord Hatherly observed- “Outsiders are bound to know the external position of the company, but are not bound to know its indoor management.”
Sections 290 provides for the 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 by reason or any defect or disqualification or had terminated by virtue of any provisions contained in this act or in 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 in the company to be invalid or to have terminated
“The object of the section is to protect persons dealing with the company outsiders as well as members by providing that the acts of a person acting as director will be treated as valid although it may afterward be discovered that his appointment was invalid or that it had terminated under any provision of this act or the articles of the company.” [3]
ESTABLISHMENT OF THE DOCTRINE
The rule was not accepted as being firmly well established in law until it was approved by the House of Lords in Mahoney v East Holyford Mining Co.[4] In this case, It was contained in the company’s article that a cheque should be signed by 2 of the 3 directors and also by the secretary. But in this case the director who signed the cheque was not properly appointed. The court said that that whether director was properly appointed or not it comes under the internal management of the company and the third party who receives cheque were entitled to presume that the directors had been properly appointed, and cash cheques.
Exceptions to doctrine of indoor management
In following circumstances relief of indoor management cannot be claimed by an outsider who is dealing with the company.
Where the outsider had knowledge of irregularity I Hope it may helps u.....
The person entering into a transaction with the company only needed to satisfy that his proposed transaction is not inconsistent with the articles and memorandum of the company. He is not bound to see the internal irregularities of the company and if there are any internal irregularities than company will be liable as the person has acted in the good faith and he did not know about the internal arrangement of the company.
The rule is based upon obvious reason of convenience in business relations. Firstly, the articles of association and memorandum are public documents and they are open to public for inspection. Hence an outsider “is presumed to know the constitution of a company, but what may or may not have taken place within the doors that are closed to him.”[1]
ORIGIN OF THE DOCTRINE
This doctrine was laid down in the case of Royal British Bank V. Turquand,[2]
The directors of the company borrowed some money from the plaintiff. The article of company provides for the borrowing of money on bonds but there was a necessary condition that a resolution should be passed in general meeting. Now in this case shareholders claims that as there was no such resolution passed in general meeting so company is not bound to pay the money. It was held that the company is bound to pay back the loan. As directors could borrow but subjected to the resolution, so the plaintiff had the right to infer that the necessary resolution must have been passed.
It was held that Turquand can sue the company on the strength of the bond. As he was entitles to assume that the necessary resolution had been passed. Lord Hatherly observed- “Outsiders are bound to know the external position of the company, but are not bound to know its indoor management.”
Sections 290 provides for the 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 by reason or any defect or disqualification or had terminated by virtue of any provisions contained in this act or in 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 in the company to be invalid or to have terminated
“The object of the section is to protect persons dealing with the company outsiders as well as members by providing that the acts of a person acting as director will be treated as valid although it may afterward be discovered that his appointment was invalid or that it had terminated under any provision of this act or the articles of the company.” [3]
ESTABLISHMENT OF THE DOCTRINE
The rule was not accepted as being firmly well established in law until it was approved by the House of Lords in Mahoney v East Holyford Mining Co.[4] In this case, It was contained in the company’s article that a cheque should be signed by 2 of the 3 directors and also by the secretary. But in this case the director who signed the cheque was not properly appointed. The court said that that whether director was properly appointed or not it comes under the internal management of the company and the third party who receives cheque were entitled to presume that the directors had been properly appointed, and cash cheques.
Exceptions to doctrine of indoor management
In following circumstances relief of indoor management cannot be claimed by an outsider who is dealing with the company.
Where the outsider had knowledge of irregularity I Hope it may helps u.....
Similar questions