Bank

62 Kumar Questions
with the help ut
Q.12. Explain the doctrine of 'Indoor-Management'
and also describe the exception of
this principle.
Turquand Principle Management-The ruie of
of the Doctrine of Indoor
Ans. Meaning Doctrine of
is the exception to the
doctrine of the indoor management
with a company are entitled
Notice. It means the outsiders dealing
Constructive
been regularly do1.e so
far as the internat
that everything has
to assume
concerned. This is called the rule
company are
proceedings management ofthe GE. & B 327. It is also
in the Royal British Vs. Tarquand (1856)
laid down
known as Rule Tarquand.
British Bank issueda bond to
In the above case the directors ofthe Royal
directors had power to issue the
bonds only if they had been
Tarquand. The
resolution. On a suit by Tarquand
authorized to do so by passing of a special
had been
since no special resolution
the Bank turned back and said that
to Tarquand.
to issue the said Bonds
passed, the directors had no authority he was
held that Tarquand could sue on the Bond and
The court, however,
court observed
entitled to assume that a resolution
had been duly passed. The
documents
with the company are bound to read the registered
persons dealing but are not
is not inconsistent therewith
and to see that the proposed dealing
of the internal
need not enquire into the regularity
bound to do more they
not bound to enquire
Thus, it was held that an outsider, being
proceedings. that
had been taken he is entitled to assume
whether ail the necessary steps
Froni the above decision it is clear that an
the directors had acted properly.
that tihe domestic affairs of the company are
outsider is entitled to assume
doctrine is intended to protect an outsider dealing
perfectly conducted. This conduct of
with a corporation from their possible irregularities in the
registered
of course to the basic condition that his
the affairs of that corporation subject
clean hands. The principle is apparently based
dealing is bonafide and he has
on the principle convenience for business could not be carried out if a person
dealing with the agents of a company could not be carried out if a person

dealing with the agents of a company was compelled to call for evidence that
intesnal regulations had been duly observed.
Thus, it will be observed that the doctrine of constructive notice doc
er
not extend to the internal proceedings of the company so as to fix the strang
dealing with the company with the notice ofany irregularity in suchproceed ngs
For
and thereby disentitle him to his claim against a company. Accordingly, Fo
hich
Example; ifa person is dealing with a directorofcompany in a matter in wh
a director would normally have power to act for the company then that pei
e T s o n

obliged to enquire
have

is not whether the lormalities

required by the articies
 Company iaw 63

or not betore the aforesaid director exercises that power

soen
be
complied with
are imalters ofinternal management which an
outsider dealing
Such formalities
is not bound to investigate. On the contrary, he
is entitled to
with the company
in fact they
that they have been properly complied with even though
assume
not have been complied with
at al!.
may
Indoor Management
Exceptions to the Doctrine of
wili not be applicable
1. Forgery-The doctrine of indoor Management
of the company
to do something on behalf
in cases where a person purports
In Ruben Vs. Great Fingall
which is not within the ordinary ambit ofhis power.
of the company forged the
Consolidated,1906, A.C. 439, the secretary certificate
directors required under the articles on a share
signatures oftwo ofthe
The Hon'ble Court held that company
a
arnd issued the same without authority. certificate was
committed by its ofticers and the
cannot be bound by forgeries

a nullity and the party simply

lost his money as he was no a shareholder
doctrine of Indoor Management
shall
2. Knowledge of Irregularity-The
where claiming to have benefit of this
not be applicable in cases persons
irregularity. In Howard
doctrine are the persons who have knowledge of the
to borrow
D. 1561, the directors had the power
Vs. patent Ivory Co. 38 Ch.
borrow more than i.000, they
had to obtain the consent of
money but if they
meetings. Without such consent having been
the share holders in general
took debentures.
borrowed 52,000 from themselves and
obtained they, however, that they
Now since these directors
had debentures issued to them. Knowing
been obtained.
without the consent of the share holders having
could not do so
hold them and
the doctrine of indoor management could not
it was held that
stated the notice of
extent of 5,000 only. Brietly
the company was liableto the
afforded by this doctrine.
irregularity kills the protections does
Irregularity-The doctrine of indoor management
3. Suspicion of
who is inquiry in circumstances under
put upon
O apply in the case a person ifhe had made proper enquiries.
he would have discovered the irregularity
ich reasonable doubt one Is bound to
on
OUnCr words, if by ordinary prudence doctrine would not come
matter and ifhe neglects
to do so ihe
uire into the trausaction or iis
to the unusual nature of
cases even
" Tescue. In some with a conpany up0n
enquiry as to its
dealing
u d e may put the person as also in Ram
bein authorized as was held in a number of English decision
" General Investnments
Lid. (1952,1 ALE.R.
ration Ltd. Vs. Proved'Tin &
had been put on
554). Thus,
hus, where the person dealing with the company
should suffer for his
sheer
enquiry but fails to make proper enquires he
indolence.
 64 Kumar Questions Bank
4. Ignorance About the Contents of Articles-The doctrine of ind.
managemeint does not apply to cases where a person dealing with the compa
mdoos
any
has not in fact consulted and gone through the articles (and memorandum) ana
even if he would have examined those documents, he would not have revealed
the irreguiarity. The case of Lakshmi Rattan Lal Cotton Mills Vs. J.K.
Jute
Mills Co., AIR 1957 All 311. illustretes rule-
In this case, 'G'was the director ofa
company. The company had managing
agents whose director was also G'. The Articles authorised the directors
to
borrow money and also
empowered them to delegate this power to any other
director or directors. G borrowed
money from the plaintiff. The company refused
to be bound by the loan on the
that plea there was no resolution as to delegation
of power to G However, the Court
held the company liable. The reason being
that even if there was no actual
resolution authorising G to enter into
transactions, the plaintiff was right in assuming that the power which could
have been delegated under the artiles must
have been actually conferred in
fact.
The case of British Thomson Houston Co.
Vs. Federated
Ltd. (1932) 2 KB 176. further illustrates this European Bank
point. In this case the articles of
the company provided that the directors had
power to decide as to who should
be entitled to sign contracts and
documents on behalf of the
director describing himself as the chairman and company. One
without having been so
authorised, executed and gave a guarantee to the
The Court held that
plaintiff in company's name.
plaintiff was entitled to assume that the chairman was duly
authorised to act for the company. The Court held
officer of the company openly
that, "if the outsiders find an
have power to confer
exercising an authority, which the directors
upon him, they are relieved from the
inquiry and are entitled to assume that the duty of further
conferred". power has been regularly and duly

Explaining the rule the extent to which

as to
essential, Atkin, L.J. in Kreditbank Cassel knowledge of articles 1s
"Ifyou are dealing with a director in a matter inVs. Schenkers Ltd., observed
have power to act for the which normally a director would
company, you are not obliged to
not the formalities
required by the articles have ingquire whether o
exercises the power". been complied with before ne
This view has found
as Paimer and
support from eminent writers such
Gower. on
company law su