“DOCTRINE OF INDOOR MANAGEMENT-

LAXMI RATTAN COTTON MLLS CASE”

A project submitted to

Army Institute of Law, Mohali

By
(AYUSHI JARYAL Roll No. – 1827)

Under the guidance of Dr. Bhupinder Kaur

COMPANY LAW
In partial fulfillment of the requirements for the award of
Degree BA.LLB
Punjabi University, Patiala (Punjab)
Feb–Aug 2021

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 ACKNOWLEDGEMENT

This project would not have been possible without the kind support and help of my

teacher Dr. Bhupinder Kaur. I would like to extend my sincere gratitude to her for giving me

the golden opportunity to prepare the project on “DOCTRINE OF INDOOR

MANAGEMENT- LAXMI RATTAN COTTON MILLS CO. LTD V. JK JUTE MILLS

CO. LTD” which is not only enriching and interesting but also a means to enhancing my

patience and hard work. I am also highly indebted to Army Institute of Law, Mohali and the

library staff for their guidance and constant supervision as well as for providing necessary

information regarding the project & also for their supporting me in completing the project.

I would also like to express my gratitude towards my parents and friends for their kind

cooperation and encouragement which helped me in completion of the project in the limited

time frame.

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 INTRODUCTION

The doctrine of indoor management, also known as Turquand rule is a 150-year old concept,
which protects the outsiders against the actions done by the company.
Any person who enters into a contract with the company shall ensure that the transaction is
authorised by the articles and memorandum of the company. There is no requirement to look
into the internal irregularities, and even if there are any irregularities, the company shall be
held liable since the person has acted on the grounds of good faith.
To absorb the concept of this doctrine, it is important to understand the concept of the
doctrine of constructive notice. Both the concept of indoor management and constructive
notice is explained below.

ORIGIN OF DOCTRINE OF INDOOR MANAGEMENT

The doctrine originated from the landmark case Royal British Bank V Turquand1. The facts
of the case are as follows. The Articles of the company provide for the borrowing of money
on bonds, which requires a resolution to be passed in the General Meeting. The directors did
acquire the loan but failed to pass the resolution. The repayment on loan defaulted, and the
company was held liable. The shareholders refused to accept the claim in the absence of the
resolution. Held, the company shall be liable since the person dealing with the company is
entitled to assume that there has been necessary compliance with regards to the internal
management.
The rule was further endorsed by the House of Lords in Mahony V East Holyford Mining
Co.2  In this case, the Articles of the company provided that the cheque shall be signed by
two directors and countersigned by the secretary. It later came to light that neither the
directors nor the secretary who signed the cheque was appointed properly. Held, the person
receiving such cheque shall be entitled to the amount since the appointment of directors is a
part of the internal management of the company and a person dealing with the company is not
required to enquire about it.
The above view held in the case of House of Lords in Mahony V East Holyford Mining Co. 3
is supported by Section 176 of the Companies Act, 2013, which states that the defects in the
appointment of the director shall not invalidate the acts done.
The doctrine provides the third parties who enter into a contract with the company is
protected find out internal irregularities that take place in a company, hence the company will
be liable for any loss suffered by them due to these irregularities.
The doctrine of constructive notice protects the company against the claim of third parties
while the doctrine of indoor management protects the third parties against the company
procedures.

1
(1856) 6 E&B 327
2
[1875] LR 7 HL 869.
3
Ibid

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EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT
The doctrine of indoor management has been used for almost a century now. Since in the
modern world, the companies extended their roles to various social and political spheres,
therefore the scope of this doctrine was widened. Since the scope was widened, the chances
of its misuse also increased, so the courts came up with following exceptions to this rule:

Knowledge of Irregularity

This exception covers situations where the person dealing with a company is aware of the
irregularities which are present in internal management. Such knowledge can be either by
actual or constructive notice, and the person thus cannot claim the benefit under the rule of
indoor management.4

This exemption can be better understood, by considering the case of T.R. Pratt (Bombay)
Ltd. v. E.D. Sassoon & Co. Ltd.5, wherein one company lent some money to another
company on a mortgage of its assets. However, the procedure which was necessary to comply
before such transaction, was not complied with. The directors of the two companies were the
same. The court thus held that since the lender had notice of the irregularity, the doctrine
could not be invoked and hence the mortgage was not binding. The transfer was approved by
two directors, and the transferor was aware of the fact that one of the directors was not
validly appointed, and the other was disqualified being the transferee himself. Hence, the
court held that the transfer was ineffective.

Negligence

The person cannot invoke this doctrine if the person, who is entering into a contract with the
company, has not enquired prudently and has not made proper inquiries, because of which he
is not aware of the irregularity. If he would have conducted proper inquiries, then would have
known that irregularity exists, and hence it is because of his own fault that he is unaware of
the irregularity. This exception also covers the situation where the situations surrounding the
contract were so suspicious that a prudent person would have made an inquiry, but the
concerned person has not done so and hence is not entitled to claim the benefit of the
doctrine.

4
Koessler, M. ‘The Person in Imagination or Persona Ficta of the Corporation’, 9 Louisiana
Law Review 435 (1948-490
5
AIR 1936 Bom 62

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This exception could be better understood while referring to the case of Anand Bihari Lal v.
Dinshaw & Co.6. In this case, the plaintiff accepted a transfer of a company’s property from
its accountant. The court held that the transaction entered by the accountant was clearly
beyond the scope of his authority, and hence the transfer was void. The plaintiff was
reasonably expected to see the power of attorney executed in favour of the accountant before
accepting such transfer by the accountant on behalf of the company.

Forgery

The doctrine of internal management cannot be used to validate transactions in which the
person relies on a document which has been forged. The leading case on this point is
of Shri Kishan Rathi v. Mondal Brothers and Co. (P.) Ltd. 7. In this case, the plaintiff was
the transferee of a share certificate issued under the seal of the defendant company. The
certificate which was issued contained the seal of the company and forged signatures of two
directors, and such forgery was done by the company’s secretary. It was being argued by the
plaintiff that the matter regarding the genuineness of the signature is a part of internal
management, and thus, such forgery of the signature cannot be contended by the company.
But the court held that the doctrine of indoor management cannot be extended to validate and
cover forgery cases. The court also said that this doctrine applies to irregularities which might
affect a genuine transaction and not to forgery.

Representation through Articles

This exception deals with the most controversial and highly confusing aspect of the doctrine
of indoor management. Articles of association generally contains what is called the “power of
delegation”. The case in which the meaning and effect of a delegation clause has been
explained is the case of Lakshmi Ratan Cotton Mills v. J.K. Jute Mills Co.8. One G was a
director of a company. The company had managing agents of which also G was a director.
The article of association, empowered the directors to borrow money and to further delegate
this power to any of them. G borrowed a sum of money from the plaintiffs. The company
argued that since there was no resolution of the board delegating the power to borrow to G,
he was not authorized to borrow money and hence refused to be bound by the loan. But the
court held that the company is bound to repay the loan.

6
(1946) 48 BOMLR 293
7
AIR 1967 Cal 75
8
AIR 1957 All 311

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Thus it can be said that the effect of a delegation clause is that a person who enters into a
contract with an individual director of a company, with the knowledge that the board has
power to delegate its authority to such an individual, he may assume that the power of
delegation has been exercised, and thus can claim the benefit under this doctrine.

Acts outside the scope of apparent authority

This exception covers situations wherein, if an officer of a company enters into a contract
with a third party and if the act of the officer is beyond the scope of his authority, the
company is not bound by such act of the officer. So in these situations, the plaintiff cannot
claim the protection of the doctrine of indoor management merely because under the Articles
the power to do the act could have been delegated to him. The plaintiff can sue the company
only if the power to act has in fact been delegated to the officer with whom he has entered
into the contract.9

CONCLUSION

The doctrine of constructive notice doctrine expects each and every outsider not only to know
the documents of the company but also presumes to understand the exact nature of
documents, which is practically not possible, and thus, in my opinion, is a little unfavourable
to the outsiders dealing with the company. However, in reality, the company is not known by
the documents but by the people who represent it and deal with an outsider. Those who enter
into contracts with the company usually do so, on the basis of goodwill and reputation of the
persons representing the company rather than the documents of the company.

Hence, the courts have evolved the doctrine of indoor management as an opposite to the
doctrine of constructive notice in order to protect the interests of the outsiders. In my opinion,
the doctrine of indoor management is absolutely necessary for protecting the outsiders and
forcing the company to fulfill their part of obligation in genuine transactions. This also needs
to be implemented subject to certain exceptions and the same have been evolved by the
courts.

9
Koessler, M. ‘The Person in Imagination or Persona Ficta of the Corporation’, 9 Louisiana Law
Review 435