Articles of the company give powers to the directors of the company besides laying down rules, regulations and procedure. Outsiders have a right to assume that the rules and procedures are being followed by the company in their regular exercise of the internal proceedings of the company and that the directors are dealing within the authority and within the rules laid down.
It is the duty of every person to read the memorandum and Articles of the company. But he is not bound to inquire into the internal affairs of the company whether they are being conducted in accordance with the Articles of the company. He has a right to assume that internal proceedings and affairs of the company are being regularly carried on in accordance with the rules and regulations. This limitation to doctrine of constructive notice is called indoor management.
The doctrine of indoor management has been analysed in the following words: If the directors have powers and authority to bind the company but if certain preliminaries are required to be gone through on the part of the company before a power can be duly exercised then the person contracting with the directors is not found to see that all those preliminaries have been observed. He is entitled to presume that the directors are acting lawfully in all respects. This is called doctrine of indoor management. In the others words an outsider is not to take care of the management of the company and has the right to assume that things are in order.
The Articles of the company provided that the directors could give a bond, if authorized by the resolution of the company. The directors gave a bond to Turquand without passing a resolution. It was held that Turquand was entitled to assume that the resolution was passed. The company therefore bound by the bond Doctrine of indoor management is also popularly known as Turquand rule.
Exceptions to the doctrine of indoor management
In the following cases a person cannot claim protection under the doctrine of indoor management:
1) Ultra vires acts: Where the act is ultra vires the Memorandum of Associations it is void abinitio, for example forgery.
A share certificate was forged by the secretary of the company and issued under the seal of the company; it cannot confer any right to the holder thereof.
2) Knowledge of irregularity: Where the third person dealing with the company has actual or constructive notice regarding the noncompliance and irregularity of the internal procedure prescribed by the Articles of Associations.
A company lends money to B company on mortgage of it as assets without complying with the rules laid down in its particles and where one of the directors of the two companies was the same. It was held that it may be presumed that A company had notice of the irregularities.
The directors themselves lent to the company an amount in excess of the borrowing powers of the company, without the consent of the shareholders in the general meeting. It was held that the directors had the notice of the extent of the borrowing powers of the company, therefore the company was not liable to the excess amount lent by the directors.
3) Act of an agent outside the scope of his authority: Where the act of an agent making the contract on behalf of the company falls outside the binding authority of the agent the company will not held liable.
Branch manager without having received any authority from the company and in fraud drew seven bills on behalf of the company. It was held that it was not within the authority of the managers to draw bills unless he had received actual authority. The company was therefore, not bound.
Source: Business Law