This article is written by Shreya Patel. It exhaustively covers the doctrine of indoor management along with its origin, history, meaning, and importance of the doctrine along with some examples. The article further explains the exceptions to the doctrine, the key differences between the doctrine of indoor management and the doctrine of constructive notice, and the judicial interpretation of the doctrine in India. The article also includes a detailed explanation of the doctrine and its position under company law in India. 

Table of Contents

Introduction

Businesses continuously engage with third parties whether customers, suppliers, or their investors. They regularly enter into many types of contracts, partnerships and transactions wherein the main elements are trust and good faith. Both parties rely on trust and assume that the other party is adhering to all rules and regulations. It is also assumed that the internal processes of the companies are functioning steadily. What happens when something goes wrong in the company’s internal process? And the third party is also not aware of the same? How will the third party protect themselves in this case? This is where the doctrine of indoor management comes in. The doctrine protects the third parties who have acted in good faith. 

There are numerous doctrines present in the corporate world which help in establishing the relationship which guarantees the protection of the company’s stakeholders, the indoor management doctrine is one such doctrine. The doctrine of indoor management is one of the oldest concepts. The doctrine of indoor management is famously referred to as the ‘Turquand Rule’. The doctrine of indoor management is a 150 year old principle. 

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This legal principle observed in India emerged to protect the external parties from the companies. As per this doctrine, it is stipulated that the in-house matters of the company are to be taken care of by the company’s directors and not by any external parties. The doctrine relies on the concept that the directors of the company are the ones who are fully aware of the company’s affairs and its internal procedures.

Before moving on to the detailed discussion of the doctrine of indoor management, let’s briefly discuss what this doctrine is all about and how it has evolved over time in India. 

Doctrine of Indoor Management

The doctrine of indoor management oversees the relationship of external parties with investors, creditors, customers of the company as well as the stakeholders. The doctrine attempts to protect the rights of the third parties who enter into the business under the presumption that the internal issues are managed by adhering to the bylaws of the company. If the representatives and the executives of the company have insufficient legal capacity and still act on behalf of the company, the external parties then depend on the presumed authority. 

This doctrine helps in establishing the balance between the interests of the stakeholders and the internal control of the company. The doctrine of indoor management emphasises that when the outsiders’ actions are in good faith at the time of entering into a transaction, it can be presumed that there are no irregularities in the internal and other procedural requirements of the company and the company has complied with all such requirements. 

The case of Raja Bahadur Shivlal Motilal vs. The Tricumdas Mills Company, Limited (1911) is the first case ever where the doctrine of indoor management was applied in India in the year 1911. In the case of Ramaswami Nadar vs. Narayana Reddiar AIR 1967 Mad 115, the third party had advanced money from the company using a promissory note which had to be signed by 2 company directors and a resolution was supposed to be passed for the same. The board had passed no resolution relating to it and hence the company denied such recovery. The Bombay High Court applied the doctrine and held that the third party was not bound to conduct an inquiry on whether such a resolution had taken place or not. 

Objective of Doctrine of Indoor Management

The main objective of this doctrine is to protect third parties from the consequence which takes place due to internal irregularities. It protects the external parties when they enter into a contract with a company and if any discrepancies take place from the side of the company. The doctrine is based on the assumption that the external parties are often incapable of finding internal irregularities in the company. In such instances, the company is considered liable. Acting in good faith is a prerequisite for the application of this doctrine. 

Evolution of Doctrine of Indoor Management

The doctrine of indoor management is a legal principle that protects the external parties when they are dealing with the officers of the company who hold certain authority to conduct some acts. The doctrine has been in place for years to protect third parties, the same being used in India since 1911. The origin of the doctrine of indoor management can be traced to one of the most significant English cases of Royal British Bank vs. Turquand, (1856) 6 E&B 327, hence the doctrine is also known as ‘Turquand rule’. This case held that the people who are interacting with the company are entitled to assume that all the internal processes are followed by the company even when the same is not the case. 

Royal British Bank vs. Turquand (1856) 6 E&B 327

Facts of the case

In this case, the directors of the Royal British Bank issued a bond to Turquand who was not a company’s employee. The claimant had borrowed the money from the directors of the company. All the required internal processes which were mentioned in the AoA (Articles of Association) of the company were not followed. It was mentioned in the AoA that a general meeting has to be set up and a resolution has to be passed for the same, which was not done in this case. The shareholders argued that there was no resolution passed and no general meeting was conducted, hence they were not compelled to pay. It was stated by the bank that Turquand was expected to have the knowledge that the directors had violated the laws and the bond was hence unlawful.

Issues raised
  1. Whether the bank could recover the loan, when there was an irregularity in the resolution of the board?
  2. Whether the Royal British Bank was responsible for payments of the bond?
Judgement of the case

The court ruled in favour of Turquand. It was ruled by the court that the company was liable because the people who deal with the company were under the impression that the company had followed all rules and regulations along with the internal procedures which were required. Turquand had relied on the authority of the directors and hence had no reason to believe that there were any mandatory internal processes which were not followed. 

In this case, a rule was formed that the transactions which were a part of the company’s normal business course, and involved third parties, it would be assumed that all the required internal processes and other requirements were being followed. If the transaction was considered as a standard procedure of the company it would be deemed that all the internal policies were followed.

The doctrine was affirmed in the case of Mahony vs. East Holyford Mining Co. [1875] LR 7 HL 869. In this case, the AoA of the company required the signature of both the secretary and the two directors on the cheques. It was later found that the signs of the director and secretary which were taken on the cheques, were not properly appointed by the company as per the requirements laid down in the AoA. The House of Lords (Ireland) in this case held that the cheque’s recipient was eligible for the payments because the director’s appointment was regarded as an internal procedure and the people who were dealing with the company were not required to oversee such matters. 

Evolution of Doctrine of Indoor Management from Indian perspective

The doctrine was first used in the case of Raja Bahadur Shivlal Motilal vs. The Tricumdas Mills Company, Limited (1911). The plaintiff had given a loan to the defendant’s company. After the death of the principal director, the company went into liquidation and a charge was established on the property which was mortgaged by the plaintiff. The plaintiff and his lawyers were not aware that the respondent company’s board of directors lacked the minimum requirement of the directors as mentioned in the AoA and proceeded with advancing the loan. Now the company is denying such a loan. 

The Bombay High Court ruled that both the plaintiff and his legal counsel had the right to believe that all the steps that were being taken were legal and correct. They also believe that all the required steps were taken for executing the contract and the same was completed accurately as well by the respondent’s company. The plaintiff and his legal counsel had no means to know that the board of directors of the respondent company were understaffed and that they lacked the minimum requirement which was mentioned in the AoA. The plaintiff had the right to believe that his settlement was passed within the timeline stated.

Though the doctrine is not explicitly mentioned under the Companies Act till now but its legal basis is found in some of the statutory provisions like Section 176 of the Companies Act, 2013 (hereinafter mentioned as 2013 Act) or Section 290 of the Companies Act, 1956 (hereinafter mentioned as 1956 Act), (which is now repealed). 

Let’s assume that you are dealing with a company and have entered into a contract with them. As an external party you will fully trust the company and their employees for eg. a director. As an outsider you will believe that all the internal processes are followed by the director. If something is not right in the later stages due to an act conducted by the director, the third party will not be harmed or blamed for the same. The below given Sections explain the same that if any company or their employees miss something or make any mistake the doctrine will protect these external parties.

Section 176 of the 2013 Act states that the defect in the appointment of the directors will not nullify their actions. The Section further states that the defects made in the director’s appointment will not invalidate the actions that are taken by them. If the companies use the same as a defence, stating that the decision which is taken by the director is invalid as they were not appointed properly as per the rules and regulations mentioned in the Act, or have some defects or disqualifications it will not be considered by the courts. Provided that the company is already aware of the same and has taken or is taking steps in order to rectify the same. 

Similarly, Section 290 of the 1956 Act (which is now repealed) directly states that the acts which are done by the directors will be considered valid. It does not matter that after such an act has been carried out, such a director’s appointment was discovered to be invalid due to any reasons. 

Importance of Doctrine of Indoor Management

The doctrine of indoor management focuses on the principle of convenience which is why it is considered one of the important doctrines under corporate law. It will be hard to conduct business if the external parties have to contact the company’s agents who have the authority and ask for proof related to the internal affairs and procedures that are being followed. This doctrine is based on the concept of perceived convenience in business partnerships. The AoA and MoA are public documents, but there are other internal procedures that are private and are known only to those who have authority. Hence the external parties are aware of the contents in AoA and MoA but they might not be aware of the internal affairs of the company. 

  • It protects the external parties who are innocent, have acted in good faith, and assume that the company works by fully adhering to the public documents. 
  • It provides protection to the external parties who conduct valid and legal business and releases them from responsibilities if any irregularity takes place in the internal procedures of the company. 
  • The doctrine also recognises that it is unreasonable to expect that the external parties are familiar with the company’s internal affairs. It would be considered unfair to hold third parties responsible for something that they were not aware of. 
  • The fluidity of the business transactions is maintained by the doctrine of indoor management which results in promoting the sector’s growth and also fosters various investment opportunities. 
  • The doctrine of indoor management helps the business streamline transactions and promotes trust between the company and third parties.
  • The doctrine helps in reducing the abuse of the principle of constructive notice (a principle that states that all parties involved with any company are assumed to have the knowledge of AoA and MoA of the company), which is why it is followed by the courts and is applied till date.

This doctrine in the company law allows the external parties to enter into transactions and contracts with the business and also rely upon the documents and representation of that particular company without having the need to inquire or carry out an investigation in relation to the internal affairs of the company. If all the documents of the company seem to be legal, the external parties can assume all the internal processes of the company are completed accurately. 

In the case of Sri Krishna Rathi vs. Mondal Bros. And Co. (P) Ltd And Anr (1965), the manager of the company as per the MoA and AoA had the authority to borrow a specific sum of money. The manager borrowed money from Hundi (a traditional financial instrument). The money that was borrowed was not placed in the company’s strongbox. The Calcutta High Court held that the company had to acknowledge the Hundi. The money was lent with a bonafide intention. The lender could not get the money due to the fraudulent actions of the manager. Hence the company was held liable for the same as the lender believed that the manager was functioning under the authority given to him by the company.

Provisions related to the doctrine of indoor management

The objective is to protect the external parties from the companies’ fraudulent transactions. The provisions related to indoor management are not explicitly codified in many jurisdictions but are backed by the principles of company law and other statutes which give significance to preserving the integrity of the business transactions. 

For instance, Section 134 of the 2013 Act mandates that the companies have to make financial statements that are true and fair in nature so that the shareholders can view and the same get an idea of the company’s finances. This Section helps in preserving the integrity of the business transactions. 

Similarly, Section 188 of the 2013 Act deals with related party transactions which states that all the transactions are to be carried out with the approval of the company’s shareholders or the board. The Section aids in avoiding future conflicts between third parties and the company. And if such conflicts take place the doctrine of indoor management can be used to protect the third parties if they have acted in good faith. 

The company laws outline the powers and duties of the  director and officer along with all the procedures required to conduct different acts in the company. These laws recognise the internal governance and the practical aspects of business transactions. A framework is established by the company where all the responsibilities and the company laws are made transparent for the outsiders, so they can rely on these when they enter into a contract with the company. 

Illustrations 

Let’s understand the doctrine of indoor management with some illustrations.

A company known as Sheetal Ltd. has a director named Ms. Sheetal, and she has the authority to sign contracts. Ms. Sheetal entered into a contract with a construction company to renovate the first floor of the office without the approval of the board. The construction company was not aware of the internal processes which are to be followed for the same and assumed that the contract was totally valid in nature as Ms Sheetal had the authority. Ms Sheetal acted out of her authority, still, the construction company can enforce the contract on Sheetal Ltd. The doctrine of indoor management will protect the rights of the construction company as they entered into the contract in good faith and were not aware of the internal irregularities.

XYZ bank’s policy stated that if a loan exceeding Rs. 25,00,000 is given, a board’s approval is required to approve such a loan. Mr. Sharma, an executive of the bank signed an agreement for a loan with another bank ABC for Rs. 35,00,000. Mr. Sharma did not have the authority to do the same with the approval of the board. ABC Bank simply assumed that Mr. Sharma had the authority which was required. As per the doctrine of indoor management ABC Bank can legally enforce the agreement with XYZ Bank. ABC bank can be protected as it relied on the apparent authority which they believed Mr. Sharma had, and XYZ bank’s internal affairs and procedures are not the concern of the other party.

A sales manager in Greentech Industries had some specified authority. There was an old memo used for internal uses which listed that the sales manager had some extended powers to sign certain documents. The sales manager negotiated a deal with a contractor on the basis of the old internal memo. The company which entered into the deal can enforce the deal with Greentech Industries. The doctrine will protect the external party as they relied on the sales manager’s authority.

Prima Sphere is a design company, where the company’s seal is required on all contracts. The company’s manager Mr. Ghosh entered into a partnership agreement with Wellness Fibres. At the time of signing the agreement, Mr. Ghosh did not put the seal. With the doctrine of indoor management Wellness Fibres can still enforce the agreement as they simply relied on the apparent authority of the manager, despite the absence of the seal of the company. 

These illustrations explain the relevance of the doctrine in protecting the external parties who act in good faith and rely upon the assumed authority of the company. 

Criticism of Doctrine of Indoor Management

Like every coin has two sides, so does this doctrine. Along with the significance of the doctrines there are some criticisms as well. One of the criticisms of the doctrine of indoor management is that it provides only limited protection to a company. When a prohibited activity is carried out by an employee or a director of the company, this doctrine in that case offers very little defence. Despite not knowing the internal procedures of the company, the external parties enter into agreements with them, which exposes the companies to a high amount of unauthorised transactions which may result in fraud as well. 

The application of the doctrine of indoor management is often subjected to unanticipated outcomes. It is also very challenging to determine whether the external party really had a reason to believe that the company’s directors and employees were overstepping their authority. There is no accurate description of what is constituted as the normal activities of the company. It is also viewed that the doctrine of indoor management at times also encourages a clash of interests between the directors of the company and their shareholders. 

The directors of the company can abuse their powers and also act against the AoA of the company. This happens because the parties believe that directors have the power to carry out such activities. In these situations, the shareholders of the company are the ones who have to suffer due to the incompetence of the director and his actions. On a practical note, it is also observed that there can be difficulty in finding the legality of these transactions and objections which may result in legal proceedings.

In the case of Hely-Hutchinson vs. Brayhead Ltd [1968] 1 QB 549, the English Court had brought to notice the concerns related to the doctrine of indoor management and its applicability. This doctrine should be used only when the external parties act in good faith and there is no reason to believe that they assumed something was not right. The doctrine of indoor management is a rule of evidence and not a rule of law. This doctrine has often attracted criticism on the note that it has the tendency to cause harm to the interests of the shareholders even if this doctrine provided protection to the outsiders.

Applicability of Doctrine of Indoor Management on government authorities 

The Apex Court of India in the case of M/S. M.R.F. Ltd vs. Manohar Parrikar & Ors (2010) analysed the doctrine of indoor management for the first time. The case was not directly related to the doctrine as it was a public law case, but the doctrine was referred to in the case in order to draw a comparison in cases where the doctrine was directly applicable.

A notification was issued by the State Government, which stated that a rebate would be granted in tariff for twenty-five percent in relation to the power supply to both low and high-tension industrial consumers. The same notification was nullified by another notification which was issued by the Ministry of Power. The validity of the notifications was challenged stating that both notifications were not in compliance with Article 166 of the Indian Constitution when read with Article 154 and also the Governor framed Business Rules of the Government. 

The decision was taken without submitting the same to the Chief Minister or the Council of Ministers. The concurrence of the financial department was also not obtained. Due to this, it was held that the notifications were not sustainable in law. A decision is only considered when all the requirements laid down are followed by the issuing authority.  When a decision which has financial ramifications is taken by any minister without consulting the finance department and the same is mentioned in the rules, it will not be considered as a government decision as per Article 154. These decisions were void ab initio and all the consequent actions taken in relation to these decisions were null and void. 

It was also discussed in the case that –

“Both the doctrine of constructive notice and doctrine of indoor management are in direct contract which leads to a presumption that the same results in a favour for the company and is against the third parties. The indoor management notion is an exception to the constructive notice rule. The doctrine of indoor management imposes a limitation on constructive notice rule. As per the doctrine the external parties presume that the employees of the enterprise are observing the internal requirements which are mentioned in the AoA and MoA properly.” 

“Hence the external parties are protected by this doctrine when they are dealing with the companies and on the other hand the doctrine of constructive notice safeguards the corporation’s employees and directors when they are dealing with third parties. The suspicion of irregularities is one of the most recognised exceptions for the doctrine of indoor management. If there are circumstances which lead to suspicion then an inquiry is carried out”

In this case, the exception was applied. There was reasonable doubt in relation to the conduct of the minister’s powers when the notifications were issued. Therefore the doctrine of indoor management was not considered to be applicable in this case. 

Exceptions to the Doctrine of Indoor Management 

There are some exceptions to this doctrine, where the external parties are not protected under this doctrine as they were aware of the irregularities which might take place in the company.

Forgery and fraud

When the acts are done in the name of the company and the company is not aware of the same then these acts are considered void ab initio as it a fraud. When a document is forged and the external parties rely on the same, then in such instances, the doctrine of indoor management will not apply. If the documents themselves are forged, then the company and its employees will not be held liable for forgery, as the same was not conducted by them. 

In the English case Ruben vs. Great Fingall Ltd. [1906] 1 AC 439, a share certificate was received by the plaintiff which was issued by the company with a seal on it. The share certificate was forged and was issued by the company’s secretary by forging the director’s signature and affixing the seal. The plaintiff’s side argued that determining the genuineness of the documents should be counted as an internal matter of the company and the company should be liable for the same. The court in this case ruled that the doctrine of indoor management does not cover forgery matters. The Apex Court in the case of Vishwa Vijai Bharti vs. Fakhrul Hasan & Ors  (1976) ruled that when a document is forged, it will be considered void ab initio and hence it will not create a legal claim. 

Similarly, in the case of Kreditbank Cassel vs. Schenkers Ltd. [1927] 1 KB 826, the manager himself signed a bill of exchange, and wrote that he had signed the bill on behalf of the company. This was considered a forgery when the bill was drawn. The bill of exchange was issued with the intention of making a payment of the debt of the manager and not the company, hence this was considered forgery. It was held that it was a different document and it was alleged that it was on behalf of the company. 

Suspicion of irregularity 

If the external parties can carry out certain inquiries and examinations regarding the internal procedures of the company and even then enter into a contract and an irregularity which was known occurs the protection under this doctrine cannot be taken. if there are circumstances which make the requirements of inquiry quite important and the outside party ignores the same and moves ahead, in that case also the doctrine of indoor management does not provide protection. 

In the Anans Behari Lal vs. Dinshaw And Co. (1945) case a property was transferred by the accountant of the company and the same was accepted by the plaintiff. The Bombay High Court held that transferring such property is considered invalid. And the accountant of the company cannot have such powers to transfer the company which is very easily known to the plaintiff as well, because how can an accountant of the company transfer any property of the company. 

Knowledge of irregularity

When the third parties at the time of dealing with the company are aware of the internal irregularities and also have the actual constructive notice, and still choose to enter into that contract, then the external parties will not be considered eligible to seek protection under the doctrine of indoor management.

In the popular case of Howard vs. The Patent Ivory Manufacturing Company (1888) 38 Ch D 156, the agreement of the company mentioned that the director may borrow up to one thousand pounds from the company. If the limit for borrowing the money is to be increased then first permission has to be taken in the general meeting. One of the company’s directors got 3500 pounds without passing such a resolution. A fine was levied from the company of one thousand pounds under the doctrine of indoor management as the company’s director was aware of the resolution and still chose to ignore the same and move ahead. 

In the case of Devi Ditta Mal vs. The Standard Bank of India (1927) 101 IC 558, the transfer of shares was approved by 2 company directors. The transferor has the prior knowledge that one of the directors is disqualified to make such approval as he himself is a trustee. And the other director was not appointed validly. Despite this, he entered into the transactions. The transfer of shares was considered invalid and ineffective. 

Ignorance about the contents of Articles of Association 

This exception states that the doctrine will not apply in cases where the parties have not consulted the MoA or AoA before entering into the transaction. If some action is clearly mentioned in the AoA of the company where it is stated that no general meeting has to approve the action and it can be taken solely by the director of the company using his knowledge and experience then in such cases, the company cannot say that the director did not pass a resolution. The power to the director is mentioned in the AoA itself hence this defence cannot be used by the company.

In the case of Rama Corporation vs. Proved Tin & General Investment Co. (1952) 1 ALL ER 554,  the director entered into a contract and took the cheque from Rama Corporation acting on behalf of the investment company. The AoA of the company included that the director can delegate the power to one director to carry such acts. The content of the AoA was never read by Rama Corporation. In the later stages, it was found that the director who had entered into the contract was never delegated such powers. The plaintiff relied on the indoor management doctrine. The court held that they could not rely on the doctrine as they were not aware in the first place that such delegation of power was even possible. 

Doctrine of Indoor Management under Company Law

There is no specific mention of the doctrine of indoor management in the Companies Act, 2013. Section 176 of the 2013 Act and Section 290 of the 1956 Act both mention that the acts considered by the directors will not be considered invalid, even if it is found that their appointment had some defect due to any reason. The courts in India recognize and acknowledge the doctrine. There are many cases in India where the judges used the doctrine of indoor management. 

In Varkey Souriar vs. Keraleeya Banking Co. Ltd (1957), the doctrine of indoor management was approved. It was observed by the court that it is true that it is expected that when a company is governed by the AoA and MoA and has a public office, those parties that do business with such company are required to go over the content of AoA and MoA and other vital documents to ensure that the transaction they are going to enter is not in conflict with any of the rules of the company. The outside parties are not required to examine the internal procedures of the company. The external parties dealing with the company will believe that the activities that the director of the company is carrying out fall under his normal course of activities if there is mention of the authority in the AoA where the power for the same is delegated to the director. 

In the landmark judgement of Lakshmi Ratan Cotton Mills Co. Ltd. vs J.K. Jute Mills Co. Ltd. (1956) it was stated by the Allahabad High Court that when a loan is taken by the company, the creditor can assume that all the required rules and regulations are followed by the company in doing the same and taking a loan is not against any rules of the company. If there is a requirement for the resolution for a board meeting, then the same has taken place and the creditor does not have to consider all these things as they are a part of the internal affairs of the company. There should be good faith from the creditor’s side at the time of entering such a transaction and there should not be any suspicions related to the same.

Doctrine of Indoor Management and board resolution

A formal decision which is made by the board of directors is referred to as a board resolution which takes place during the meeting and acts as documented proof of the decision that is taken by the board in the meeting. The board resolutions are legally binding to the company, its employees, and the directors. Resolution can be special or ordinary and it is the duty of the company director to define what kind of resolution will be needed.

For a board decision to be valid, there must be a quorum present for the same. All the directors have the right to vote in such board meetings unless there is an involvement of any personal interest of any director. When majority votes are given regarding a matter such a resolution is passed and approved in the meeting. When changes in AoA are to be made they are also to be registered with the Registrar of Companies in order to be effective. If not registered in the time period given then the resolution will be deemed to be invalid.

There are a lot of other decisions taken by the board that do not require to be reported to any third party and can be kept in the internal records. As per the doctrine of indoor management, public documents such as AoA and MoA are presumed to be available in the public domain. Hence anyone dealing with the corporation assumes that the internal affairs of the company are being followed and there is no need to inquire about anything and check decisions which are made by the directors of the company.

Landmark judgements on Doctrine of Indoor Management

Charnock Collieries Co. Ld. vs. Bholanath Dhar (1912) 

The Calcutta High Court in the case of Charnock Collieries Co. Ld. vs. Bholanath Dhar (1912) determined that the lender had the right to believe that the managing agent had the approval and permission of the directors. The lender believed that approval of the board of directors was received by the managing agent when the lender provided the funds to the company up to a certain amount. 

Official Liquidator, Manasuba And Co. vs. Commissioner Of Police And Ors. (1967)

In Official Liquidator, Manasuba And Co. vs. Commissioner Of Police And Ors. (1967), it was stated by the Madras High Court that it is expected of the third party entering into a transaction with the company to read all the important documents about the company such as AoA and MoA. However, the chances of the external parties examining the regularity, legality, and propriety of the director’s act are very low and unlikely. The recent judgement by courts in India has extended the doctrine of indoor management’s scope.  The object of the doctrine will remain the same which is protecting the third party from internal irregularities when they have simply acted in good faith.

Hi-Tech Gears Ltd. vs. Yogi Pharmacy Ltd. And Ors (1997)

In Hi-Tech Gears Ltd. vs. Yogi Pharmacy Ltd. And Ors (1997), the Allahabad High Court stated that the plaintiff was an honest borrower who had borrowed the funds using the inter-corporate deposit. The complainant had the right to presume that the defendant company had met all the conditions laid down by the management and the directors had followed the protocol decided in the board of director’s meeting. 

M/S. M.R.F. Ltd vs. Manohar Parrikar & Ors (2010)

In the case of M/S. M.R.F. Ltd vs. Manohar Parrikar & Ors (2010), the Supreme Court stated that the indoor management doctrine would not apply to Goa due to the fact that there were irregularities in internal affairs and it had to be taken care of first. There should always be a balance when it comes to protecting the rights of the company as well as the third parties. An over-extensive use of the doctrine is prevented. 

Interrelation between Doctrine of Indoor Management and Doctrine of Constructive Notice

Both doctrines work closely together to protect both the third parties and the company when they enter into a contract. With the help of these doctrines, both the companies and the third parties can be kept in check and it can be ensured that no party to the contract is making unethical gains. Both doctrines were developed and are applied till today to ensure that the companies as well as the external parties can protect themselves if one of them acts unfairly. 

The doctrine of indoor management was developed as an alternative to the doctrine of constructive notice. Both these doctrines are vital in the company law as they help create a balance between the rights of the company and the external parties and provide protection to both when there is a need. 

Doctrine of Constructive Notice

The doctrine of constructive notice protects the companies from the false claims of third parties. The doctrine states that when the third parties enter into any type of contract with the company, it is assumed that the third parties are aware of the rules and regulations of the company and they have inspected the same. It is assumed the third parties have thoroughly gone through the Articles of Association (AoA)(A document which contains bylaws or rules that govern the company).

Difference between Doctrine of Indoor Management and Doctrine of Constructive Notice 

BasisDoctrine of indoor management Doctrine of constructive notice
OriginThe doctrine of indoor management evolved during the case of Royal British Bank vs. Turquand, (1856) 6 E&B 327.The doctrine of constructive notice was proposed by the House of Lords.
ObjectiveThe main objective of this doctrine is to protect the external parties. The main objective of this doctrine is to protect the companies from outside parties that claim they were not aware of the contents mentioned in the public documents (AoA and MoA). 
AwarenessAs per this doctrine, the parties are not aware of the internal affairs and procedures of the company. The internal affairs of the company are not published anywhere and can change from company to company. This kind of information may not be available to the public. The two main documents of the company which are AoA and MoA are open to the public. As these documents are published and registered with the authority they are in the public domain and everybody is aware of the contents. 
Procedures and affairs of the companyThis doctrine only talks about the internal procedures of the company which are not known to external parties. This doctrine is limited to the company’s external affairs only.
ScopeThe scope of the doctrine of indoor management is limited to protecting the external parties when they are not aware of the internal procedures. The doctrine of constructive notice has a broad scope as compared to the doctrine of indoor management as it is applicable to all the documents that are published publicly. 
ExampleFor example, if the company has an internal rule which states that before signing any loan agreement with the external party a meeting is to be considered first. The outside party will not know of such internal procedures. For example, if a company’s MoA clearly mentions that the signature of only the company directors will work on the loan agreements, and if a party enters into a loan agreement with the company and takes the signature of the secretary then it is assumed that external party had the constructive notice of the same and still chose to enter in such contract. 

Conclusion

The doctrine of indoor management plays a vital role in protecting the external parties who are engaged in the company transactions. Efficiency is promoted by this doctrine as it allows outsiders to rely on the officers of the company and their authority and establishes trust in commercial activities. It is also crucial to note that this principle has its own criticisms and exceptions where outsiders may not be given protection. This proves the significance of awareness and diligence in commercial transactions. 

With this principle,  the external parties are provided the benefit of not conducting an inquiry or having any knowledge of the internal procedures of the company. The doctrine of constructive notice and indoor management has been used by the courts to date to maintain the balance between the rights of the company and the third parties. 

Frequently Asked Questions (FAQs)

What does Section 166 of the Companies Act, 2013 entail?

Section 166 of the 2013 Act entails the doctrine of indoor management which states that the board of directors of the company will manage all the business of the company. Under this Section, the authority to delegate some specific powers (such as granting loans, fund investment, borrowing monies, representation power, etc.) is also granted to the board. These specific powers can be delegated to officers of the company, committees, or individual directors. 

Which is the most important document relating to the doctrine of indoor management?

The Articles of Association (AoA) is the most vital document with respect to the doctrine of indoor management as well. 

What are the limitations of the doctrine of indoor management?

The doctrine of indoor management does not apply when a forgery takes place, for there is negligence from the side of the third party or there is some irregularity or suspension which is already present. 

Is the doctrine of indoor management applied in India?

The application of the doctrine of indoor management is seen in India. In the case of Dewan Singh Hira Singh vs. Minerva Mills Ltd (1959), in relation to the allotment of shares, the directors only had the authority to allot 5000 shares, but they allotted more than that. It was held by the court that the allottees of the share assumed that the directors of the company had the power to do so and only acted in good faith. The allottees are not bound to know these kinds of internal details of the company.

What are the exceptions to the doctrine of constructive notice?

The exception to the doctrine of constructive notice is the principle of indoor management. Both doctrines are directly opposite in nature.

Is the doctrine of indoor management defined under the Companies Act, 2013?

There is no specific provision that defines or uses the word ‘doctrine of indoor management’ under the Act. But there are some provisions that indirectly explain the same notion, for example, Section 166 of the 2013 Act. 

References

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