The doctrine of Indoor management, popularly known as

the Turquand's rule initiallyarose some 150 years ago in the context of the doctrine of
constructive notice. The doctrine of constructive notice of a company's public documents
was, of course, abolished prospectively. The rule was partly dictated by practical
necessity - persons contracting with a company were not expected to spend their time
checking that any required resolutions had properly been passed, at meetings that had
been correctly convened, by directors whose appointments had been duly made.

The rule in Turquand's Case can operate in relation to any contractual obligation but has
over the years frequently been raised in respect of a document to which the company's
seal has been affixed. Professor Gower, summarizing the common law position in 1969,
stated:

"[Where] the third party receives a document sealed in the presence of the
appropriate individuals as stated in the articles of association, he is entitled to
rely on its formal validity. Even if the board have never resolved that the
document be sealed, he will be protected for he is not entitled to see the
minutes of the board meeting which relate to a matter of 'indoor management'
and has no means of checking whether the internal regulations have been
complied with" [1] .

In India, under the Indian Companies Act 1956, the rule has been recognized under s-290
and impliedly under s-81. The principle of indoor management is one of justice, equity
and good conscience and has emerged out of the concept of Agency. The Indian Courts
have been applying the Doctrine quite frequently and modifying according to the case in
hand.

The Paper seeks to answer how far the Turquand Rule has been instrumental in protecting
the interests of outsiders transacting bona fide with a company. An endeavor has also
been made to find out the application of the rule and its ramifications in the modern
context.

Indoor management: An antithesis to Constructive Notice principle

The company is an artificial legal person. Its objects and powers are set out in the
memorandum and articles of association as amended from time to time. The
memorandum and articles, when registered, become public documents and can be
inspected by any member of the public at the office of the RoC under Sec. 610 of the
Companies Act on payment of a nominal fee.
Thus, every person who contemplates entering into a contract with a company,
has the means of ascertaining and consequently presumed to know, not only the exact
powers of the company but also to the extent to which these powers have been delegated
to the directors and of any limitation placed upon the exercise of these powers. Every
person dealing with the company is deemed to have a constructive notice of the contents
of its memorandum and AoA. Hence, if a person enters into a contract which is beyond
the powers of the company, as defined in the memorandum, he cannot acquire any rights
under the contract against the company.
This rule proved to be too inconvenient for business transactions and hindered the
smooth flow of business. The rigours of the rule was, therefore, alleviated by the judicial
pronouncement in Royal British Bank v Turquand, and the doctrine of `indoor
management' serving as a partial exception to the doctrine of `constructive notice'.
While the doctrine of constructive notice seeks to protect the company against the
outsiders, the principal of indoor management operates to protect the outsiders while
dealing with the company. According to this doctrine, as laid down in the Royal British
Bank case, persons dealing with a company are not bound to inquire into the regularity of
any internal proceedings. In other words, while persons contract with a company they are
entitled to assume that the provisions of the Articles have been observed by the officers
of the company. It is no part of the duty of an outsider to see that the company carries out
its own internal regulations. It is sufficient if the act is not ultra vires.
The doctrine of constructive notice operates against the person who has failed to
inquire. But the doctrine of indoor management can be invoked by the person dealing
with the company and cannot be invoked by the company

Doctrine of indoor management

The rule in Royal British bank.Turquand(1856)
Persons dealing with the company are assumed to have read the public documents of the
company and to have ascertained that the proposed transactions are not inconsistent there
with, they are not required to no more ,they need not inquire into the regularity of the
internal proceedings and may assume that all is being done regularly.
It operates to protect outsiders against the company.

The rule is beneficial for convenience in business relations.

An outsider is presumed to know the constitution of a company, but not what may or may
not have taken place within the doors that are closed to him.

The doctrine of indoor management is also known as the TURQUAND rule after Royal British
Bank v. Turquand. In this case, the directors of a company had issued a bond to Turquand.
They had the power under the articles to issue such bond provided they were authorized by a
resolution passed by the shareholders at a general meeting of the company. But no such
resolution was passed by the company. It was held that Turquand could recover the amount of
the bond from the company on the ground that he was entitled to assume that the resolution
was passed.

In one of the case the rule was stated thus: “If the directors have the power and authority to
bind the company but certain preliminaries are required to be gone through on the part of the
company before that power can be duly exercised, and then the person contracting with the
directors is not bound to see that all these preliminaries have been observed. He is entitled to
presume that the directors are acting lawfully in what they do.”
In another case where the plaintiff sued the defendant company on a loan of Rs.1,50,000, it
was held that where the act done by a person, acting on behalf of the company, is within the
scope of his apparent or ostensible authority, it binds the company no matter whether the
plaintiff has read the document or not. In this case among other things the defendant
company raised the plea that the transaction was not binding as no resolution sanctioning the
loan was passed by the Board of directors. The court after referring to turquand’s case and
other Indian cases, held that the passing of such a resolution is a mere matter of indoor or
internal management and its absence under such circumstances, cannot be used to defeat the
just claim of a bona fide creditor.

The rule is based on public convenience and justice and the following obvious reasons:

1. the internal procedure is not a matter of public knowledge. An outsider is presumed to

know the constitution of a company, but not what may or may not have taken place within the
doors that are closed to him.

2. the lot of creditors of a limited company is not a particularly happy one; it would be
unhappier still if the company could escape liability by denying the authority of officials to act
on its behalf.

Exceptions to the doctrine of indoor management:

The exceptions to the doctrine of indoor management are as under:

1. Knowledge of irregularity: when a person dealing with a company has actual or

constructive notice of the irregularity as regards internal management, he cannot claim benefit
under the rule of indoor management. He may in some cases, be himself a part of the internal
procedure. The rule is based on common sense and any other rule would encourage ignorance
and condone dereliction of duty.

T.R Pratt (Bombay) Ltd. V. E.D. Sassoon & Co. Ltd., Company A lent money to Company B on
a mortgage of its assets. The procedure laid down in the articles for such transactions was not
complied with. The directors of the two companies were the same. Held, the lender had notice
of the irregularity and hence the mortgage was not binding.

In Howard v. Patent Ivory Co, the directors had the authority under the articles to borrow only
up to £1000 without the resolution of general meeting. For any amount beyond £1000, they
needed the consent of general meeting. But the directors borrowed £3500 from themselves
without the consent of general meeting or shareholders and accepted debentures. It was held
that they had knowledge of internal irregularity and debentures were good only up to £1000.
2. Negligence: where a person dealing with a company could discover the irregularity if he
had made proper inquiries, he cannot claim the benefit of the rule of indoor management. The
protection of the rule is also not available where the circumstances surrounding the contract
are so suspicious as to invite inquiry, and the outsider dealing with the company does not
make proper inquiry. If, for example, an officer of a company purports to act outside the
scope of his apparent authority, suspicion should arise and the outsider should make proper
inquiry before entering into a contract with the company.

Anand Bihari Lal v. Dinshaw & Co, the plaintiff, in this case, accepted a transfer of a
company’s property from its accountant. Held, the transfer was void as such a transaction was
apparently beyond the scope of the accountant’s authority. The plaintiff should have seen the
power of attorney executed in favour of the accountant by the company.

3. Forgery: the rule in turquand’s case does not apply where a person relies upon a
document that turns out to be forged since nothing can validate forgery. A company can never
be held bound for forgeries committed by its officers. The leading case on the point is :

Ruben v. Great Fingall Consolidated Co., the secretary of a company issued a share certificate
under the company’s seal with his own signature and the signature of a director forged by
him. Held, the share certificate was not binding on the company. The person who advanced
money on the strength of this certificate was not entitled to be registered as holder of the
shares.

4. Acts outside the scope of apparent authority: 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. In such a case, the plaintiff cannot claim the protection of the rule
of indoor management simply 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 entered into the contract.

Kreditbank Cassel v. Schenkers Ltd,a branch manager of a company drew and endorsed bills
of exchange on behalf of the company in favour of a payee to whom he was personally
indebted. He had no authority from the company to do so. Held, the company was not bound.
But if an officer of a company acts fraudulently under his ostensible authority on behalf of the
company, the company is liable for his fraudulent act.

Conclusion: Thus the doctrine of indoor management seeks to protect the interest of the
shareholders who are in minority or who remains in dark about whether the working of the
internal affairs of the company are being carried out in accordance with the memorandum and
articles. It lays down that persons dealing with a company having satisfied themselves that
the proposed transaction is not in its nature inconsistent with the memorandum and articles,
are not bound to inquire the regularity of any internal proceeding.