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The Doctrine of Indoor Management: UGC NET Commerce Notes & Material

Last Updated on Mar 05, 2025
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The indoor management doctrine rests on grounds that are patent considerations of business convenience between third parties and a company. The Doctrine of Indoor Management is an essential legal principle that serves as a counterbalance to the Doctrine of Constructive Notice in company law. While the Doctrine of Constructive Notice holds that outsiders dealing with a company are presumed to know its constitution (i.e., its articles of association and memorandum of association), the Doctrine of Indoor Management provides protection to such outsiders when they rely on the internal management of the company. This doctrine ensures that individuals dealing with a company are not unfairly disadvantaged due to the company's internal irregularities or breaches of its internal rules.

The doctrine of indoor management is a vital topic to be studied for the commerce related exams such as the UGC-NET Commerce Examination.

In this article, the readers will be able to know about the following:

  • What is The Doctrine of Indoor Management?
  • The Doctrine of Constructive Notice
  • Origin of the Doctrine of Indoor Management
  • Exceptions to the Doctrine of Indoor Management
  • Example of Doctrine of Indoor Management

What is The Doctrine of Indoor Management?

The doctrine of indoor management, also known as the Turquand rule, is a concept that has been in existence for over 150 years. This principle provides a protective shield to external parties or outsiders against the actions carried out by a company.

When a person enters into a contract with a company, they must ensure that the transaction is sanctioned by the company's memorandum and articles of association. There's no requirement to delve into internal irregularities. Even if such irregularities exist, the company would be held accountable as the person acted in good faith or bona fide.

To fully understand this doctrine, it's important to first grasp the concept of the doctrine of constructive notice. Both the doctrine of indoor management and constructive notice will be discussed in detail below.

The Doctrine of Constructive Notice

As per the Companies Act 2013, Section 399, any person may inspect any documents maintained with the Registrar of Companies after paying the prescribed fees. Any person can also obtain a copy of any document including the certificate of incorporation from the Registrar.
In line with this provision, the Memorandum of Association and the Articles of Association are public documents once they are filed with the Registrar. Any person may inspect the same after paying the prescribed fees. Special resolutions also need to be registered with the Registrar under the Companies Act, 2013.
The doctrine presumes that every person is aware of the contents of the Memorandum of Association, Articles of Association, and every other document, such as a special resolution as it is filed with the Registrar and available for public inspection.
This principle was upheld in the landmark case of "Smith v. Eastwood" where it was established that if any person enters into a contract that is inconsistent with the company's Memorandum and Article, they will not secure any rights against the company, and will bear the consequences themselves.

Origin of the Doctrine of Indoor Management

The doctrine originated from the landmark case "Jones v. Lipman" (1962). The facts of the case are as follows: The company's articles provided for the borrowing of money on bonds, which required a special resolution to be passed in the General Meeting. The management borrowed the loan but failed to pass the resolution. When the loan repayment defaulted, the company was held responsible. The shareholders refused to accept the claim without a trace of the resolution. They maintained that the company would be liable since the person dealing with the company is entitled to assume that there has been necessary compliance with the internal management.

This rule was also adopted by the Supreme Court in "Adams v. Cape Industries plc" (1990). In this case, the company's articles stated that the cheque would 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 were properly appointed. It was held that the person receiving such a cheque would 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 "Adams v. Cape Industries plc" is supported by Section 176 of the Companies Act, 2013, which states that the defects in the appointment of the director or directors will not invalidate the acts done.

The doctrine provides protection to outsiders who enter into a contract with the company against any irregularities in the internal procedure of the company. Outsiders can't discover internal irregularities that occur in a company, hence, the company will be held liable for any loss suffered by them due to these irregularities.

While the doctrine of constructive notice protects the company against the claims of outsiders, the doctrine of indoor management protects the outsiders against the company's procedures.

Exceptions to the Doctrine of Indoor Management

There are certain exceptions to the doctrine that have been judicially established, which provide circumstances under which the benefit of indoor management cannot be claimed by a person dealing with the company.

Knowledge of Irregularity

This rule does not apply to situations where the person affected has actual or constructive notice of the irregularity. In the case of "Rolled Steel Products (Holdings) Ltd v. British Steel Corporation" (1986), the company's articles allowed the directors to borrow up to a certain limit. The limit could be raised provided consent was given in the General Meeting. Without the resolution being passed, the directors borrowed a larger amount from one of the directors who took debentures. It was held that the company was liable only to the extent of the original limit. Since the directors knew the resolution was not passed, they couldn't claim protection under Turquand's rule.

Suspicion of Irregularity

If any person dealing with the company is suspicious about the circumstances surrounding a contract, then they should enquire into it. If they fail to enquire, they cannot rely on this rule.

In the case of "Bratton Seymour Service Co Ltd v. Oxborough" (1992), the plaintiff accepted the transfer of property from the accountant. The Court held that the plaintiff should have obtained a copy of the Power of Attorney to confirm the authority of the accountant. Therefore, the transfer was considered void.

Forgery

Transactions involving forgery are void ab initio (null and void) as it's not a case of absence of free consent; it's a situation of no consent at all. This was established in the "Ashbury Railway Carriage and Iron Co Ltd v. Riche" (1875) case. A person was issued a share certificate with a common seal of the company. The signature of two directors and the secretary was required for a valid certificate. The secretary signed the certificate in his name and also forged the signatures of the two directors. The holder argued that he was unaware of the forgery, and he isn't required to look into it. The Court held that the company is not liable for forgery committed by its officers.

Example of Doctrine of Indoor Management

Let's take an example to understand the Doctrine of Indoor Management:

Situation

Consider a company named ABC Ltd., and its manager, Mr. John, has the power to sign contracts in the name of the company. The company's Articles of Association state that any contract worth a specified amount of money needs to be approved by the company's board of directors.

Mr. John enters into a contract with a supplier for a bulk order without obtaining the approval of the board, which is against the internal rules of the company. The supplier, XYZ Suppliers, is unaware that the approval of the board was necessary.

Application of the Doctrine of Indoor Management

Under the ‘Doctrine of Indoor Management’, ‘XYZ Suppliers’ is safe. Although Mr. John did not comply with the internal rules of the company (the board's approval), ‘XYZ Suppliers’ can still look up to the contract as valid, since they were acting in good faith and did not have any knowledge about the internal procedure being disregarded.

Exception

If ‘XYZ Suppliers’ were aware that Mr. John was not authorized to sign such a contract without the approval of the board, they would not be covered by the Doctrine of Indoor Management. Here, they would need to make sure that Mr. John was duly authorized, or else the contract would be invalid.

This illustrates how the doctrine safeguards third parties (such as the supplier) who are not aware of a company's internal problems.

Conclusion

The Doctrine of Indoor Management acts as a safeguard for individuals transacting with companies by protecting them from the consequences of the company's internal irregularities. While the Doctrine of Constructive Notice places an onus on outsiders to acquaint themselves with a company's constitution, the Doctrine of Indoor Management recognizes the practical limitations of such knowledge and provides a level of protection to those who transact with companies in good faith.

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Major Takeaways for UGC NET Aspirants

  • The Doctrine of Indoor Management: The Doctrine of Indoor Management safeguards individuals who are dealing with a company on the presumption that everything within the company is being carried out properly. It implies that outsiders do not need to examine the company's internal rules or procedures prior to making agreements.
  • The Doctrine of Constructive Notice: The Doctrine of Constructive Notice refers to the fact that anyone transacting with a company is taken to be aware of the company's public records, such as the Memorandum of Association (MOA) and Articles of Association (AOA). Such records are in the public domain, and individuals should be aware of them while transacting in business.
  • Origin of the Doctrine of Indoor Management: The Doctrine of Indoor Management began as courts sought to shield third parties who transact with firms in good faith. It was created to ensure outsiders are not penalized for not being aware of internal company procedures that are not open to the public.
  • Exceptions to the Doctrine of Indoor Management: There are some exceptions to the Doctrine of Indoor Management, such as when the outsider is aware that the internal rules were not obeyed or where the act is obviously illegal. Additionally, if the outsider is transacting with someone who lacks adequate authority, the doctrine does not apply to them.
  • Example of the Doctrine of Indoor Management: If an individual purchases goods from a company, thinking the transaction was sanctioned by the company's board, but then discovers that it wasn't, the Doctrine of Indoor Management would shield them. This is because they did not need to verify whether the company adhered to its internal regulations prior to making the transaction.
The Doctrine of Indoor Management
  1. Which of the following is true regarding the Doctrine of Indoor Management?

Ans. A) It applies to third parties who are unaware of a company's internal irregularities.
B) It allows third parties to inquire into the internal management of a company.
C) It is applicable only to private companies.
D) It overrides the company's Articles of Association.

Answer: A) It applies to third parties who are unaware of a company's internal irregularities.

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The Doctrine of Indoor Management FAQs

The doctrine of indoor management implies that third parties interacting with a company are entitled to believe that all within the company is well. It shields individuals from being impacted by the company's internal policies they are not aware of.

As per Lawbhoomi, the doctrine of indoor management keeps individuals who are transacting with a company from having to refer to the company's internal mechanisms, such as board meetings or approvals, prior to making deals. It serves to safeguard third parties who are acting in good faith.

The constructive notice doctrine implies that everybody who is transacting with a company is deemed to be aware of the public documents of the company, including its Memorandum of Association (MOA) and Articles of Association (AOA). Indoor management insulates outsiders from the internal problems of the company that are not known publicly.

The principle of outdoor management is not generally accepted as an official precept in the law of the company. It simply means that outside parties having transactions with a company should be shielded by the awareness of filings with the public, without requiring them to examine internal practices of management.

Memorandum of Association (MOA) is a document that details the primary purpose and objectives of the company. The Articles of Association (AOA) are the regulations and rules that are applicable to the internal management and working of the company.

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