Doctrine of Indoor Management:
The role of doctrine of indoor management is opposed to that of the rule of constructive notice. The latter seeks to protect the company against the outsider; the former operates to protect outsiders against the company.
The ‘Doctrine of indoor management’ allows all those who deal with the company to assume that the officers of the company have observed the provisions of the articles.
In other words, the persons dealing with the company are not bound to inquire into the regularity of internal proceedings.
Case Law: Royal British Bank vs. Tarquand
The rule had its genesis in Royal British Bank vs. Tarquand.
In this case, the director of company borrowed a sum of money from the plaintiff. The company’s articles provided that the directors might borrow on bonds such sums as may from time to time be authorized by a resolution passed at a general meeting of the company. The shareholders claimed that there had been no such resolution authorizing the loan and therefore, it was taken without their authority. The company was, however, held bound by the loan. Once it was found that the directors could borrow subject to a resolution, the plaintiff had the right to infer that the necessary resolution must have been passed.
The rule is based upon obvious reasons of convenience in business relations. The Memorandum and Articles of Association are public documents, open to public inspection. But the details of internal procedure are not thus open to public inspection. Hence, 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.”
Exceptions to the Doctrine of Indoor Management:
1.Where the outsider had knowledge of irregularity
2.No knowledge of articles
3.Forgery
4.Acts outside apparent authority.
The rule does not protect any person who has actual or even an implied notice of the lack of authority of the person acting on behalf of the company. Thus, a person knowing fully well that the directors do not have the authority to make the transaction but still enters into it cannot seek protection under the rule of indoor management.
Case Law: Devi Datta Mal vs. State Bank of India
In this case, a transfer of shares was approved by two directors, one of whom within the knowledge of the transfer was disqualified by reason being the transferee himself and the other was never validly appointed, the transfer was held to be ineffective.
Again, the rule cannot be invoked in favour of a person who did not consult the memorandum and articles and thus did not rely on them.
The rule of indoor management does not extend to transactions involving forgery or otherwise void or illegal ab initio. In the case of forgery it is not that there is absence of free consent but there is no consent at all. The person whose signatures have been forged is not even aware of the transactions and the question of his consent being free or otherwise does not arise. Since there is no consent at all there is no transaction.
Lastly, if the act of an officer of a company is one which would ordinarily be beyond the powers of such an officer, the plaintiff cannot claim the protection of “the tarquand rule” simply because under the articles power to do the act could have been delegated to him. In such case the plaintiff cannot sue the company unless the power has, in fact, been delegated to the officer with whom he dealt.