A SILVER LINING FOR

THE STRANGERS DEALING

WITH THE COMPANY
 INTRODUCTION
Indoor Referred Seeks to Limitation of
Management to as protect and doctrine of
arose some TURQUAND’S safeguard the “constructive
150 years ago RULE outsiders notice”

Can be invoked Entitled to SILVER LINING

by the person Operates
presume regularity because of
dealing with of internal against
the Company procedures the company
hardships
Who are the STRANGERS ?
 Origin Of The Doctrine
This Doctrine of indoor management was first recognized in the case of
ROYAL BRITISH BANK VS TURQUAND (1856) 6 E&B 327.
FACTS OF THE CASE THE VERDICT OF THE CASE
The directors of the Company It was held that the Company would be
borrowed a certain sum from the liable to pay the amount. The Directors were
plaintiff. The Article of the Company entitled to borrow the amount only after a
provided for the borrowing of money resolution was passed in the General
on bonds with a condition attached Meeting, thus the plaintiff had the right to
to it which stated that a resolution infer that the formalities were done and the
should be passed in the general resolution was passed. Turquand was thus
meeting.  But the shareholders entitled to sue the Company on the strength
claimed that such resolution was not of the bond. Lord Hartherly in his judgment
passed in the general meeting and sated- “Outsiders are bound to know the
thus the company was not liable to external position of the company, but are
pay the money. not bound to know its indoor
management.”
 ISSUE
Whether the company was liable on that
bond?
 JUDGEMENT
The company shall be liable since the person
dealing with the company is entitled to assume
that there has been necessary compliance with
regards to the internal management.
Provisions under companies Act 1956
Section 290 of the Companies Act 1956 states
that the Acts done by the Director would be
valid irrespective of the fact that their
appointment was invalid by reason of any
defect or got terminated under any of the
provisions laid down in the Act.
ESTABLISHMENT OF THE DOCTRINE OF INDOOR MANAGEMENT
 The Doctrine of Indoor Management as identified in the Turquand Case
was not accepted until it was approved by the House of Lords in the
case of Mahoney v East Holyford Mining Company.
Facts of the case The verdict of the court

The Article of the The Court held that the

Company stated Appointment of the
that the cheque Director came under
must be signed by 2 the Internal
or 3 directors and Management of the
the secretary. But Company thus even if
the issue regarding the director was not
this case was that properly appointed, the
the Director who third party was entitled
signed the cheque to receive or cash the
was not properly cheques as he is
appointed at the entitled to presume that
time of signing. the Directors were
properly appointed.
 JUDICIAL INTERPRETATION
OF DOCTRINE OF INDOOR
MANAGEMENT
 Business is a field which demands the
protection of all parties under a contractual
relationship.
 This doctrine of Indoor management is
apparently for protection of the outsiders.
 It’s more important purpose is to promote the
investments in the business sector in order to
strike a balance between the business and the
economy.
In case of Dey v. Pullinger Engg Co.
 Justice Bray had rightly pointed out that the
wheel of commerce would not go smoothly if
outsiders dealing with companies forced to
conduct an investigation of the internal
procedure and machinery of the company to see if
something is not wrong.

 Additionally, Lord Simonds in the case of Morris

v. Kanssen stated that the people in the business
world would be shy in entering into transactions
with companies if they were to check into the
depth of the internal workings of the company.
 In the case of Lakshmi Ratan
Cotton Mills Co. Ltd, v. J.K. Jute
Mitts Co. Ltd.
 The company of plaintiff sued defendant’s
company for the total amount of Rs. 1,50,000.
The defendant company raised the argument
that no such resolution sanctioning the loan
was passed by the board of director, thus it is
not binding on the company.
In the case of Official Liquidator, Mansube &
Co. (P.) Ltd. V. Commissioner of Police
It is expected from the person that he will read the article
and memorandum when he enters into a contract with the
company but it is highly unlikely that he will also check the
legality, propriety, and regularity of acts of directors.

In a recent judgment, Indian courts had broadened the

scope of the doctrine. The object is still the same, to protect
the third party who acted in good faith with the company and
is unaware of the internal management of the company.
Exceptions To Doctrine of Indoor Management:-
• The outsider had knowledge of irregularity– The rule will not apply if the person
dealing with the company has slight knowledge about the lack of authority of
person who is acting on behalf of the company in this situation the doctrine will
not apply.
• In case this ‘outsider’ has actual knowledge of irregularity within the company.
• The benefit under the rule of indoor management would no longer be available.
• He/she may well be considered part of the irregularity .
In the case of Rama Corporation v. Proved Tin & General Investment Co:-
The X who was director in the company entered into a contract with Rama
Corporation while purporting to act on behalf of the company and he also took a
cheque from them.
The articles of the company did provide that the director may delegate their
power but Rama Corporation did not have knowledge of this as they did not
read the articles and memorandum of the company.
Now later on it was found that company had never delegated their power to X.
 Held- plaintiff cannot take the remedy of the indoor management as they even
don’t that power could be delegated.
 Forgery:-
Forgery is a criminal act that takes place when a person falsifies
something with the intent to deceive another person or entity.
A company can never be held bound for forgeries committed by
its officers.

FORGERY CASES:-
The David Stein Forgeries In the 1960s, David Stein
made a living traveling from city to city, selling paintings that
he claimed were done by European masters.
Since the artists’ signatures were in place, many people fell for the scam.
In 1967, one of these artists, Marc Chagall, saw three paintings in a New
York City gallery containing his name.
He knew these were not his works and he contacted the police.
Stein was arrested and spend 22 years in jail.
Unfortunately, shortly after his release, he was back to selling fake works
of art.
 NEGLIGENCE:-
The doctrine of indoor management, in no way, rewards those who
behave negligently.
 Negligence is a term that means carelessness or a breach of an
obligation.
 If someone is negligent in the eyes of the law, he or she could face a civil
lawsuit or even criminal charges.
The irregularities within a company could be discovered, the benefit of
the rule of indoor management would not apply.
NEGLIGENCE CASES:-
In the case of B. Anand Behari Lal v. Dinshaw & Co. (Bankers) Ltd:
 An accountant of a company in favour of Anand Behari .
 On an action brought by him for breach of contract, the court held the
transfer to be void.
 It was observed that the power of transferring immoveable property of
the company could not be considered within the apparent authority of
an accountant.
 The doctrine will not apply where the question is in regard of to the very
existence of an agency.
 CONCLUSION
 Doctrine of Indoor Management is evolved as a reaction of the Constructive
Notice.
 It is available to the outsider who had acted in the good faith and entered
into a transaction with the company , he can presume that there were no
Internal Irregularities and all the procedural requirement are satisfied.
 Doctrine of Indoor Management protects outsiders against the action of
the company. This doctrine also is a possible safeguard against the
possibility of abusing the doctrine of Constructive Notice.
 Shareholders couldn’t involved in any meeting and cannot interfere in any
decision making of the company. So it works like benefit in the favour of
shareholder as company cannot be able to SUE them.