The doctrine of indoor management which can be dated back to more than 100 years is a concept which safeguards the people outside the course of employment of a company.
The doctrine basically talks about that when a person gets into a contractual obligation with a company in good faith after observing that the contract doesn’t violate any articles and memorandums of the company, and even if after going into contract certain irregularities come forward the company will be held liable.
Doctrine of constructive notice
This doctrine talks about that it is presumed that every person before going in a contractual obligation with a company a person should be well read with the articles and memorandums as well as resolutions as all of this information is available in public domain.
S.399 of ICA (Indian companies act) 2013 states that a person can be given access to a company’s documents that are kept with the registrar for a given fee. As these documents like the articles of association, memorandums, incorporation certificate are all filed with the registrar it is the responsibility of the person who is forming a contract with the company.
If any person enters into an agreement with a company which is listed as inconsistent act for the company, the person who enters the contract will be held liable and will have to bear the consequences, this was held in the landmark judgement Oakbank Oil Co. Vs. Crum.
Origin of doctrine of indoor management
The landmark judgement in Royal British bank vs. turquand, led to the development of the doctrine of indoor management. The facts of the case were that the company in question had an article in its resolution which allowed for borrowing of money on bonds by passing of a resolution, the director acquired a loan but failed to pass a resolution in the company’s general meeting. The company defaulted on the loan and subsequently was held liable, the shareholders after receiving the news refused to accept the claim as there was absence of resolution. The court held the company liable as there is an assumption taken by the person dealing with the company that necessary guidelines and compliances are followed as per the internal rules and regulation.
Other landmark cases are House of Lords in Mahony Vs. East Holyford Mining Co. the brief facts are that the company had a policy that on every cheque had to be signed by two directors and countersigned by the secretary, and subsequently it was observed that there was no proper appointment for the directors and the secretary, but the court held that the cheque shall be entitled as it was the issue with the internal management of the company.
The doctrine of indoor management protects the third party or a person who gets into a contract and faces irregularities within the company, the third party as they cannot find any problems which the company faces internally is protected by this doctrine.
There are certain exceptions which are:
Prior knowledge of irregularities
The person if having prior knowledge cannot take the defence of this doctrine. Howard V Patent Ivory Manufacturing Company the facts are that the company allowed the directors to borrow 1000 pounds, but there was a provision were the upper limit could be raised provided consent in the general meeting, the directors without passing the resolution took 3500 pounds. The court held that company was only liable to the amount of 1000 pounds as the directors had prior knowledge that the resolution wasn’t passed in the general meeting.
Skepticism/doubt of irregularities
The person if having doubt/suspicion while dealing with the company he is liable to enquire and do research, if he isn’t able to do the following, he cannot take the defence of indoor management.
Anand Bihari Lal V Dinshaw and Co, the facts of the case are the accuser accepted a property transfer from the accountant, the Bombay high court held that the plaintiff was negligent as he should have gotten a power of attorney document made up to confirm the authority of the accountant.
If the transactions are forged the contract stands void in nature (void ab initio). Ruben V Great Fingall Consolidated the facts of the case are, a person was given an offer certificate with the seal of the organization, the secretary forged the signature of two directors and handed the certificate, the person later argued that he wasn’t aware of the forgery, the court held that even if the holder wasn’t aware the company cannot be held liable for the forgery done by their officer.
Overstepping authority by officer:
If an officer oversteps their authority, then the plaintiff cannot claim relief under this doctrine, as the officer wilfully and with his own free will overstepped his authority.
Indian jurisdiction is an evolved jurisdiction and is comparatively very advanced and in this process this doctrine was developed. The doctrine of indoor management helps to safeguard and protect the interests of the people who want to enter into a contract with a company from internal irregularities of the company.
The doctrine of constrictive notice which contradicts and safeguards the companies from the third party was very restrictive for the people and to counter measure the issue, doctrine of indoor management was introduced and it was developed to ensure that the companies acted in good faith.