Doctrine of Indoor Management

The doctrine of indoor management, popularly known as ‘Turquand’s Rule’ is an exception to the doctrine of constructive notice. It is a 150-year-old concept that came into existence to protect outsiders from enterprises.  

When it comes to the meaning of the doctrine of indoor management, it states that an individual dealing with the company must be aware of the Memorandum or article of Association. It is not required for the individual to know about the internal irregularities of the company. And in case, there is truly any irregularity in the particular company, the same will be liable to the individual who acted on the grounds of good faith.  

In other words, this doctrine of indoor management in company law emphasizes the concept that an outsider dealing with the company in good faith can assume that there are no irregularities in the working of the company and all procedural requirements have been complied with. 

Mentioning The Exception Of Doctrine Of Indoor Management

The doctrine of indoor management is a 150-year-old concept. Now that the time has evolved and thus, companies are occupying a centric position in terms of economic growth and social lifestyle, it is essential to widen the scope of this particular doctrine. The previously defined doctrine of indoor management completely favors outsiders which brings a lot of risk to the enterprises. Eventually, now you can find several exceptions to the doctrine of indoor management in company law favoring companies. 

Here mentioned is the exception of the doctrine of indoor management: 

1. Knowledge of Irregularity

 In case an outsider dealing with a particular company has actual or constructive notice about the internal irregularity of the company and still enters into the transaction, then he or she is not eligible to seek remedy under the doctrine of indoor management. 

For example, in the famous case of Howard against the Patent Ivory Manufacturing Company (1888) 38 Ch D 156, the company agreement stated that a director might borrow up to £1,000 from the company. This limit may only be extended with the General Meeting’s permission. But one director got 3,500 pounds in debentures without the resolution. The corporation was fined £1,000 under the idea of indoor management since directors knew the resolution hadn’t been passed. 

2. Forgery

It is to be noted that the doctrine of indoor management can’t be applied if an outsider is using a forged document to enter into a transaction with a particular company. Transactions involving forged documents in the name of the company are considered null and void since there is no presence of free consent.  

For example, a certificate of share or debenture is considered valid only if has the signature of two directors and one secretary. But in case, the issued share certificate is forged by the secretary for the duplicate signature of directors, then the secretary will be penalized, not the company.  

3. Negligence

In case, the outsider entering into a transaction with a particular company tried to inquire about the irregularities in the internal management but failed to discover the same, then he or she is not eligible to seek remedy under the doctrine of indoor management. 

In the famous case of Anand Bihari Lal against none other than Dinshaw & Co., a property transfer from an accountant was accepted by the plaintiff. The court found the identical property transfer invalid. The accountant’s authority does not extend to such transactions.

Conclusion

The doctrine of indoor management is a century-old concept that has been basically designed to protect outsiders against the companies they are dealing with. It is to be noticed that this particular doctrine only protects the third parties that enter into a transaction with certain companies in good faith. However, with change in time, exceptions to the doctrine of indoor management have also been specified favoring the companies. You should consider going through this guide to know about the doctrine of indoor management in detail.