What an untrue statement is included the doctrine of “Indoor Management”? Explain the exceptions to this doctrine, also.
Ans. Doctrine of Indoor Management— The doctrine of the indoor management is the exception to the doctrine of constructive notice. It MOMS that outsiders dealing with a company are entitled to assume that everything has been regularly done so far as the internal proceedings of the company are concerned. This is called the rule laid down in the Royal British Bank V.s. Tarquand (1856) GE. & B. 327.1n this case the directors of the Royal British Bank issued a bond to Tarquand; The directors had power to issue the bonds only if they had been authorized to da so by passing of a special resolution. On a suit by Tarquand the Bank turned hack and said that since no special resolution had been passed the directors had no authority to issue the said Bonds to Tarquand. The court, however, held that Tarquand could sue on the Bond and he was entitled to assume that a resolution had been duly passed.
The court observed persons dealing with the company are bound to read the registered documents and to see that the proposed dealing is not inconsistent therewith but are not bound to do more they need not enquire into the regularity of the internal proceedings. Thus, it was held that an outsider, being not bound to enquire whether all the necessary steps had been taken he is entitled to assume that the directors had acted properly.
Form the above decision it is clear that an outsider is entitled to assume that the domestic affairs of the company are perfectly conducted. This doctrine is intended to protect an outsider dealing with a registered corporation from their possible irregularities in the conduct of the affairs of that corporation subject of course to the basic condition that his dealing is bonafide and he has clean hands. The principle is apparently based on the principle of convenience for business could not be carried out if a person dealing with the agents of a company was compelled to call for evidence that internal regulations had been duly observed.
Thus, it will be observed that the doctrine of constructive notice does not extend to the internal proceedings of the company so as to fix the stranger dealing with the company with the notice of any irregularity in such proceedings and thereby disentitle him to his claim against a company. Accordingly, For Example; if a person is dealing with a director of company in a matter in which a director would normally have power to act for the company then that person is not obliged to enquire whether the formalities required by the articles have been complied with or not before the aforesaid director exercises that power. Such formalities are maters of internal management which an outsider dealing with the company is not bound to investigate. On the contrary, he is entitled to assume that they have been properly complied with even though in fact they may not have been complied with at all.
Exceptions to the Doctrine of Indoor Management-
1. Forgery- The doctrine of Indoor Management will not be applicable in cases where a person purports to do something on behalf of the company which is not within the ordinary ambit of his power. In Ruben V.s. Great Fingal] Consolidated, 1906, A.C. 439, the secretary of the company forged the signatures of two of the directors required under the articles on a share certificate and issued the same without authority. The Hon’ble Court held that a company cannot be bound by forgeries committed by its officers and the certificate was a nullity and the party simply lost his money as he was not a shareholder.
2. Knowledge of Irregularity-The doctrine of Indoor Management shall not be applicable in cases where persons claiming to have benefit of this doctrine are the persons who have knowledge of the irregularity. In Howard Vs. Patent Ivory Co. 38 Ch. D. 1561, the directors had the power to borrow money but if they borrow more than 1 ,000, they had to obtain the consent of the share holders in general meetings. Without such consent having been obtained they, however, borrowed 52,000 from themselves and took debentures. Now since these directors had debentures issued to them. Knowing that they could not do so without the consent of the share holders having been obtained, it was held that the doctrine of indoor management could not hold them and the company was liable to the extent of 5,000 only briefly stated the notice of irregularity kills the protections afforded by this doctrine.
3. Suspicion of Irregularity-The doctrine of indoor management Mors not apply in, the’ case a person who is put upon inquiry in effinstances under which he would have discovered the irregularity if hr hod. made proper enquiries. In other words, if by ordinary prudence on reasonable doubt one is bound to enquire into the matter and if he neglects to do so the doctrine would not come to his rescue. In some cases even the unusual nature of transaction or its magnitude may put the person dealing with a company upon enquiry as to its being authorized as was held in a number of English decision as also in Ram Corporation Ltd. V.s. Proved Tin & General Investments Ltd, (19521 All. E.R. 554). Thus, where the person dealing with the company had how put of the enquiry but fails to make proper enquiries he should suffer for his sheer indolence.
4. Representation through Articles-A person who does not have actual knowledge of the company’s articles cannot claim as against the company that he was entailed to assume that a power which could have been delegated to the directors was in fact so delegated. Rama Corporation V.s. Proved Tin and General Investment Co. [195212 Q.B.147 is an authority for this controversial proposition.
In the above case, the plaintiffs contracted with a director of the defendant company and gave him a cheque under the contract. That director could have been authorized under the company’s articles, but was not in fact so authorized. The plaintiffs had not seen the articles. The director misappropriated the cheque and the plaintiffs sued the company.
The company was held not liable. The act was outside the ostensible authority of the particular director. The company had done nothing to hold him out as having that authority. If an officer is held out as having authority by reason only of the provisibris in the articles knowledge of those provisions is essential. But if the holding out takes place outside the articles, knowledge of articles would be irrelevant. Thus, where a director was openly acting as the chairman of a company a guarantee signed by him was held binding on the company. It was immaterial that the party taking, the guarantee did not know what the company’s articles provided. Similarly, where a director to the knowledge of the other directors and shareholders acted as managing director the company was held bound to pay the architects whom he had appointed.