This doctrine states about the right of presumption available to an outsider dealing with the company. The doctrine of indoor management, also known as the Turquand rule is a 150-year old concept, which protects outsiders against the actions done by the company.
Any person who enters into a contract with the company shall ensure that the transaction is authorised by the AOA and MOA of the company. There is no requirement to look into the internal irregularities, and even if there are any irregularities, the company shall be held liable since the person has acted on the grounds of good faith.
In other words, an outsider who has consulted the MOA & AOA of the company, i.e., has complied with the principle of constructive notice is empowered with a right to presume that whatever has been stated in the charter of the company (MOA & AOA) has been performed or followed by the company in relation to such contract.
The doctrine of constructive notice presumes that every person has knowledge of the contents of the Memorandum of Association, Articles of Association and every other document such as special resolutions as it is filed with the Registrar and available for public view.
This doctrine is based on legal maxim, “Omnia Praesumuntur Rit Esse Acts” which means that doing the right thing rightly.
Example :- Abc received a cheque from Xyz company. The Articles of Association of Xyz company provided that cheques issued by the company need to be signed by two directors and countersigned by the secretary. The directors nor the secretary who signed the cheque was appointed properly and thus the cheque issued was not valid. Abc sued the company for the irregularities in the procedure. Is Abc liable for relief?
Answer — Abc is entitled to relief and the company has to pay the amount of the cheque 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.
EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT
- Knowledge of Irregularity :- This rule does not apply to circumstances where the person affected has actual or constructive notice of the irregularity.
- Suspicious of Irregularity :- In case any person dealing with the company is suspicious about the circumstances revolving around a contract, then he shall enquire into it. If he fails to enquire, he cannot rely on this rule.
- Forgery :- Transactions involving forgery are void ab initio (null and void) since it is not the case of absence of free consent; it is a situation of no consent at all.
- Illegal/Void Act :- Any illegal act done will not cover under this doctrine.
- Act beyond the scope of apparent authority
RELEVANT CASE LAWS
The Royal British Bank v. Turquand [1843-60] All ER Rep. 435
Facts: The plaintiff (the Royal British Bank) sued the defendant (Turquand, the liquidator of an insolvent company, Cameron’s Coalbrook Steam, Coal and Swansea and Loughor Railway Company) for repayment of a bond issued by the company before becoming insolvent. It was alleged that the company had on 6th March 1850 issued a bond for 2000 pounds to the plaintiff for securing the company’s drawings on its current account. The bond was signed by two directors and the secretary with the company’s seal affixed. The bank alleged that the directors of the company had exceeded their authority in borrowing the money because the company’s articles of association allowed the company to borrow only up to an amount authorised by a company resolution. When the company was sued for default on repayment of the bond, the company claimed that the bond was issued without the proper authority of the shareholders. Therefore, the company does not recognise the bond and thus deemed itself not liable to repay the bond. The Court of Queen’s Bench allowed the plaintiff’s claim. The defendant appealed.
Issue: Whether the company is liable to the repayment of the bond?
Judgement: Based on the facts, the clauses of the company’s registered deed of settlement appeared that the directors were authorised to give bills, notes, bonds or mortgage and the directors might borrow on bond of a sum authorised by the company through a general resolution from time to time. When the appellant claimed for repayment of the bond, the company claimed that there is no such resolution passed to issue the bond. Therefore, the bond was given without the authority or consent of the shareholders of the company. The facts show that there was indeed a resolution passed authorising the directors to borrow on bond “on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlement and the Act of Parliament” but it did not define the amount to be borrowed. The Court held that when dealing with companies, the parties dealing with them are bound to read the statute and the deed of settlement but they are not bound to do more. The appellant in this case after reading the deed of settlement would find that the company is permitted to issue bonds on certain conditions. After knowing that a resolution had been passed, the appellant would have the right to assume that the conditions had been satisfied by the company and thus the bond is valid.
The Court concluded that the Royal British Bank was liable for the bonds.
Freeman and Lockyer v. Buckhurst Park Properties (Mangal), Ltd.[1964] 1 All E.R. 630
Facts: Buckhurst Park Properties (Mangal) Ltd., a construction company, hired Freeman & Lockyer, an architectural firm, for a construction project. The firm appointed Mr. Broomhead as their representative to communicate with the company. However, Mr. Broomhead was not authorized to appoint subcontractors on behalf of the firm. Despite lacking the necessary authority, Mr. Broomhead went ahead and appointed a subcontractor for certain construction work without the knowledge or permission of the company. Once the project was completed, the subcontractor demanded payment from the company for the work done. These facts lay the foundation for the court’s examination and ultimate ruling concerning the company’s liability for Mr. Broomhead’s actions, which were carried out without proper authorization.
Issue: Whether the board should pay the architect despite the fact that they had let Kapoor assume the duty of a managing director?
Judgement: This case falls under the jurisdiction of the English courts. Diplock LJ emphasized that if the board confers actual authority to an individual without a formal resolution, it renders the board liable for a fine. This principle is supported by Section 50(1) of the Companies Act 1948. Furthermore, Diplock LJ highlighted that even if a person does not have actual authority to act on behalf of a company, a contract can still be enforced under certain circumstances. These circumstances include when an agent had the authority to enter similar contracts, the person granting the authority had the authority themselves, the contracting party was induced by these representations to enter the agreement, and the company had the capacity to act. In the case at hand, all of these conditions were fulfilled. The board was aware of Kapoor’s general activities and permitted him to engage in such activities, thereby representing his authority to enter into contracts for similar matters. Additionally, the company’s articles conferred full power to the board. Freeman and Lockyer were induced to enter the contract based on these representations, and the company had the capacity to act. Court held that the judge was correct in ruling that the company was obligated to pay Freeman and Lockyer for their architectural services.
Kotla Venkataswamy v. Chinta Ramamurthy AIR 1934 Mad. 579
Facts: The plaintiff, Kotla Venkataswamy, held a mortgage bond that had been executed by a company known as the South Indian Agricultural and Industrial Improvement Co., Ltd. This bond was purportedly executed on behalf of a company known as the South Indian Agricultural and Industrial Improvement Co., Ltd., in favor of an individual named Venkamma. Subsequently, Venkamma transferred her rights in the bond to the plaintiff. Kotla Venkataswamy, the plaintiff, asserted that the company had a consistent history of making payments toward both the principal debt and the associated interest to her. The company went into liquidation and the mortgage property was sold and purchased by defendant no. 4. The AoA of South Indian Agricultural and Industrial Improvement Co. Ltd provided that the “all deeds, hundies, cheques, certificates and other instruments shall be signed by the Managing Director, the Secretary and the Working Director on the behalf of the company and shall be considered valid”. As a result, Kotla Venkataswamy initiated legal action by filing a lawsuit in a lower court. Her objective was to enforce her rights regarding the mortgaged property. However, in the initial legal proceedings at the lower court, the plaintiff’s contention was rejected. The lower court did not rule in her favor. The Trial Court said that the mortgage bond was not properly executed to make the company liable.
Issue: Whether the mortgage deed was valid executed and make the company liable?
Judgement: The Court observed that the suit document, as has been said, is signed only by the Secretary and the Working Director, and not by the Managing Director.It is said, but not very satisfactorily proved, that the Managing Director had been dismissed and was under prosecution on a criminal charge at the time the document was executed. The mere fact however that the services of the Managing Director were no longer available to the Company will not make execution by the remaining officers any more valid. The Court further observed that Article 15 of AoA is intended to authorize the three officers named to execute deeds on behalf of the company that power must reside only in the body of directors as a whole. The Court further observed that the Secretary and the Working Director by themselves were not legally competent to execute the mortgage deed. The Court said that the execution of the bond was marked by irregularity, yet the mortgagee is entitled to enforce it upon the general principle that there was every reason to believe that the officers who execrated it had authority to do so. The Court observed that the directors and the shareholders & the directors exceeded their authority, but this was not known to the plaintiffs and no illegality appeared on the face of the bond, nor were the shareholders prejudiced. If an illegality does & appear on the face of the bond, the plaintiff will not be thus protected.
The Court held that the deed was not valid as the others were not competent to sign the deed and the plaintiff could not claim under the deed.
Dehradun-Mussoorie Electric Tramway Co. v. Jagmandar Das and Others AIR 1932 All 141
Facts: This is a defendant’s appeal arising out of a suit for sale upon the basis of a mortgage. The defendant is the Dehradun Mussoorie Electric Tramway Company, Limited (in liquidation). This company was incorporated about the end of August, 1921, having a registered office at Dehradun. The plaintiffs are the proprietors of a Bank at Dehradun and the company had an account with that Bank. On the 19th of January, 1923, the plaintiffs allowed the company, at the request of their managing agent Mr. Beltie Shah Gilani, an overdraft of Rs. 25,000. The mortgage deed in suit was executed on the 19th of June, 1923, by Mr. Bertie Shah on behalf of the company in favour of the plaintiffs to secure the overdraft. The defendants admit receipt of the consideration by the company. The defendants have no objection to treating the plaintiffs as unsecured creditors, but plead that the company is not bound by the mortgage deed. The trial court held that the mortgage was valid and binding upon the company and decreed the plaintiffs’ suit. The articles of the company provided that the directors could delegate all the powers except the power to borrow but the managing agents took the overdraft (that is cash is less but withdrawal is more) without the approval of the board was held binding the court saying that such temporary loans must be kept outside the purview of the relevant provisions.
Issue: Whether Mr. Beltie Shah had authority to borrow Rs. 25,000 from the plaintiffs on behalf of the company?
Whether the mortgage deed was executed in such a manner as to bind the company under the provisions of Company law?
Judgement: The court held that even if Mr. Beltie Shah exceeded his powers in obtaining the loan to meet an emergency his action was never repudiated, but on the contrary was clearly ratified by the Board of Directors; so we hold that the company cannot escape liability on the ground that their managing agent had no authority to raise the loan. The mortgage deed was signed by Mr. Beltie Shah in his capacity as managing agent of the company and it bears the common seal of the company. No rule of law applicable to companies in general, or to this company in particular, has been shown to us requiring a deed of mortgage to be executed on behalf of a company by affixation of the common seal. If a document under seal is not necessary, then a mere defect in the manner of affixing the seal will not render the document invalid. The appeal was allowed and varied the decree of the trial court by granting to the plaintiffs a simple money decree for Rs. 29,773-4-3 to be realised by them in due course of liquidation.
The appellants will get half the costs of this appeal and those in the court below from the respondents. The respondents will bear their own costs.
The Court rejected the doctrine of constructive liability and the Company was held liable to the party to the transaction. The Doctrine of Indoor management was therefore created as an exception to the Doctrine of constructive Notice so as to counter its effect and protect the third party against any arbitrary action of the company and prevents the latter from evading their liability.
