INTRODUCTION

The company law Indoor Management Rule is a rule which was created as a result of the
notion of business convenience. It states simply that an outsider dealing with a company
ought to be able to make certain assumptions about the regularity of the internal affairs of the
company. The Indoor Management Rule has been developed as Australian law having its
origins in English common law. The most significant case to consider the common law rule
in Australia is the case of Northside Developments v Registrar-Central. The Corporations
Law currently contains provisions for the operation of the Indoor Management Rule. The
purpose of this paper is to consider the application of the recent appeal decisions in Bank of
New Zealand v Fiberi Pty Ltd and Story v Advance Bank Australia Ltd in the context of the
previous case decisions in the area.

At that time, the concept of limited liability was not yet born and the insecurity posed by this
doctrine to the creditor, was balanced by the risk of the shareholders in incurring unlimited
liability. However, with the arrival of Limited liability, the judiciary constantly has tried to
bypass or do way with this doctrine completely.

With the advent of the Companies Act of 1985 and subsequently, the act of 2006, this
doctrine is all but eradicated from the English corporate law. Thus, all discussions on this
topic in this research paper except for the parts that deal with the current legal position are all
for mere academic discussion. However, in India the rule was never too strictly applied but
continues to persist and the Indian jurisprudence, for this reason has been discussed
separately in this paper.

This research paper also analyses the doctrine of indoor management that is often called an
exception to the ruel of constructive notice but the researchers have critically evaluated the
true nature of this doctrine and its expansive ambit. The researcher has then gone ahead with
connecting this doctrine with the general principles of agency in order to restrict its ambit,
lest it become a monster like its parent, the doctrine of Constructive Notice. Here, the
researchers have started with a detailed analysis of the law of agency as applicable to the
Company law. At the same time, the researchers have taken care to maintain a coherent flow
of arguments: the doctrine of constrctive notice is restricted by the doctrine of indoor
management which, in turn, is restricted by the application of the rule of Ostensible
authority.
However, this research paper has also restricted its own scope by not accounting for the
liability of the agent in cases of fraud or misrepresentation of self-authority. It also steers
itself clear of the doctrine of Ultra Vires, making only necessary and incidental references to
it for the purposes of clarifying the nature of the Doctrines of Constructive Notice and Indoor
Management.
2. CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES

Now, first of all I would like to discuss constructive notice of memorandum and articles of
association. Now memorandum and articles of association are public documents. As we know
that as soon as the company is incorporated or the company is registered most important
documents are filled with the registrar of a company. Now these documents become public
documents and any person wants to deal with the company. He is expected to go into the
details of memorandum and articles of association. At the same time that person is also
expected to have understood well the contents of memorandum and articles of association.
Now every person dealing with the company is deemed to have constructive notice of its
memorandum and articles of association. So any person who intends to deal with the
company is presumed to have the complete knowledge of the contents of memorandum and
articles of association. If anything wrong happens in future. Then he cannot say; he was not
aware of the contents memorandum and articles of association because both are considered as
public document as soon as the company is incorporated.

Now, presumed knowledge of memorandum and article is called constructive notice. So we

can say that whenever a person who wants to deal with the company is always presumed that
he has properly understood the contents of the articles and memorandum of association of a
company. Presumes not only to have read memorandum and articles of a company, but also
to have understood their proper meaning.

Now, so far as a person is concerned, who wants to deal with the company is also expected
to have properly understood the meaning of the contents of memorandum and articles of
association. The memorandum and articles must be read together in the event of any
ambiguity. Any person who wants to deal with the company is not only expected to have
excess to contents of these two documents but at the same time, if there is any sort of
ambiguity then the person is also expect to have read together with the contents of
memorandum and articles of association.

3. DOCTRINE OF INDOOR MANAGEMENT

Now, we discuss doctrine of indoor management. So far as the doctrine of constraint notice is
concerned that is providing protection to the company against the outsiders. So far as the
doctrine of indoor management is concerned that provides protection to the outsider against
the company. As we know that a person who enters into the contact with the company is well
expected to have the excess of the contents of memorandum and articles of association.

So, therefore we can say that he is presumed to be having the complete knowledge of the
contents of these documents. But at the same time that person cannot be presumed to have the
knowledge of the internal proceeding that is taking place in the company. So constructive
notice is to protect the company against the outsiders. The principle of indoor management
operates to protect outsiders against the company. So we can say that so far as indoor
management is concerned that is in interest of the person, who wants to contact into the
company. Now that person cannot be expected to have the complete knowledge of what is
happening in the companies, so far as the internal management, internal machinery is
concerned. Now doctrine of indoor management is an exception to constructive notice. Every
person is dealing with the company is not presumed to have knowledge of internal
proceeding of a company.

Now, so far as the contents of articles and memorandum of association are concerned. They
must be well known by the person, who wants to make the contact with the company. But at
the same time we cannot presume to know that every internal proceeding has taken place
properly. Whenever, that matter is dealt with by the company. Now every person is dealing
with the company is entitled to assume that the company has carried out its own internal
regulation and proceeding. It is known as doctrine of indoor management.

Now according to this doctrine of indoor management. Every person who wants to deal with
the company is well assumed that every internal proceeding has been carried out smoothly
properly by the company. Observation of justice Barry in this connection is very important.
The wheel of commerce would not go around smoothly, a person dealing with companies
were compelled to investigating thoroughly the internal machinery of a company to see, if
something is wrong.

Now, according to observation. Definitely a person, it is expected to be presumed that every

internal proceeding has taken place in the company well internal matter is concerned. In that
case the commerce will not do smoothly or we can say in this connection definitely lot of
problems will arise. So it is very important that we should presume that every person who
want to deal with the company must not be expected that he has complete knowledge of so
far as the internal management, internal machinery of the company is concerned.
Now doctrine of indoor management is also known as TURQUAND’S RULE. As it is laid
down in English case of royal British bank v/s Turquand. Now so far as a doctrine of indoor
management is concerned that was propounded in the very important and very interesting
case that is royal British bank v/s Turquand. Therefore this is called Turquand rule. Now we
discuss what are the contents of this case; first is director has power to borrow on bonds if
authorized by resolution in general meeting. In this case directors were authorized to borrow
money only when proper regulation is passed in the general meeting or we can say; directors
can be empowered to borrow anything against bonds only when in this connection general
resolution is passed in the meeting. Second is director issue bonds without regulations passed
in the meeting to Turquand, but in fact the 4 bonds are issued by the directors but in this
connection regulation has not been passed in the general meeting. Therefore directors are not
entitled to issue bonds to Turquand.

So that was held in case, the Turquand could shoot a company with assumption that
necessary reservation has been passed. Now so far as the director of the company are
concerned. There are very much part of the internal machinery of the company and their
expected to complete all the internal proceeding before anything is done. Or there must be
well aware that which is to be done by the director and how it can be done without passing
resolution in the general meeting. Therefore Turquand was very much entitled to get the
amounts against the bonds issued by the company.

4. EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT –

But there are some exceptions which are applicable to the doctrine of indoor management or
we can say that in all the cases the outsiders who want to deal with the company cannot be
provided the benefit of doctrine of indoor management.

Now in some cases the benefit of doctrine indoor management will not be given to the
outsider, who wants to deal with the company. The first is knowledge of irregularities. Now
sometimes what happens that irregularity has taken place in the internal machinery of the
company internal proceeding have been properly carried out. But at the same time, the person
is well aware of that in after that if he makes the contact with the company, in this connection
the benefit of doctrine of indoor management cannot be provided to that person.

In this connection this case is very important. Howara versus Patent Wory manufacturing
company. Now these are the contents of this case. As per articles of association, the director
had powered to borrow up to one thousand pounds and they could exceed the limit with the
consent of general meeting of a company. Now in this case directors definitely were
empowered to borrow money but not exceeding 1000 pounds. If we want to borrow money
exceeding 1000 pounds then definitely they are required to get prior permission from the
general meeting of the company. The directors borrowed 3500 pounds from the directors
without such consent. 5 Now director has borrowed money of 3500 pounds from another
director but in this connection no consent was taken from the meeting. Therefore work done
by the director cannot be considered as valid. It was held that directors were deemed to have
the notice of internal regulation. Since the director was part of the internal machine of the
company, therefore he was very much expected to know the internal proceeding of the
company.

So in this connection, director was well aware of the fact that indoor proceeding has not been
properly complied with therefore it was held that directors were deemed to have the notice of
internal irregularity and in this case the benefit of doctrine of indoor management cannot be
provided to the outsiders. Now second is no knowledge of memorandum and articles of
association. As we discussed earlier that so far as the constructive notice is concerned.

Every person wants to deal with the company is well expected to have the complete
knowledge of contents of memorandum and articles of association. So, in this case if a person
has not been able to know the content of these two documents in this connection, the benefit
cannot be provided to person. Who is not aware of the content of memorandum and articles
of association. Now in this connection this case is very important. Rama Corporation v/s Tin
and General Investment Co. Now we discuss the contents of this case. First is powers can be
delegated by the directors other than to borrow to any committee. Means powers so far as of
the directors are concerned, they can be delegated but in respect of borrowing money. These
power cannot be delegated, second is one of the director purporting to act on behalf of the
company entered into a contact with another company to take cheque from that company.

Now, in this case, since the power to borrow money cannot be delegated but one of the
directors has entered into the contact with another company to take a cheque from that
company. So in fact powers were not delegated that company had not inspected the articles of
the company. Since the articles of association contains that so far the powers are concerned.
Powers cannot be delegated in respect of borrowing the money. But in this case the company
who has entered into the contract 6 has not been able to inspect the constants f the articles of
association. Therefore, the benefit of doctrine of indoor management cannot be provided to
that company.

5. EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT –

Now third is forgery, now any person relied upon a document, which is forged by an officer
of a company cannot take benefit of doctrine of indoor management. Now in case of
documents, which are issued by the company and they are considered as forgery. In this
connection the benefit of doctrine indoor management cannot be provided to a person. Who
deals with the company? Now in this connection this case is very important.

Now we discuss the contents of this case. First is a secretary of a company forged a certificate
and issued to Ruben of money advance in the seal of a company. Now so far as a secretary is
concerned. He issued a certificate to another person in order to get money out from that
person. But that certificate was considered as forged by the secretary.

Now signature of director was forged by the secretary, so far as the documents was issued by
the secretary that was later on sign by the director that was not genuine but forged and the
court in this connection observed that doctrine of indoor management is not applicable in this
case. So, we can say that in case of documents which are considered as forged and they were
issued in order to get some money advanced by the authority of the company. In this
connection the benefit of doctrine indoor management cannot be provided to person who
wants to make contact with the company. Now this note in this connection is very important.
If a company represents that a forged document is original. Then it may not be allowed to
deny its genuineness and may be held by the document.

Now in this case we can say that whenever the documents issued by the company and
company itself claims that the documents is original. Now in this situation the benefit of
doctrine indoor management will definitely provided to a person. Who makes the contracts
with the company? Now fourth is suspicious of irregularity.

If the person is dealing with the company has some suspicion of irregularity regarding
internal management. Now whenever person who makes the contact with the company has
got suspicion regarding irregularity which has taken place in the internal proceeding of the
company. Even then if we make contact with the company then benefit of doctrine of indoor
management cannot be given to a person, who is well aware of the irregularities being taken
place in the internal machinery of the company? Now in this connection this case is very
important; Anand Bihari Lal v/s Binsa & Company, now these are the contents of this case.
An accountant of a company agreed to transfer the property of a company.

Now so far as the accountant of a company is concerned. Normally he is not authorized to

transfer the assets of the company to other person. Now transfer was held void and it was
beyond the scope and accountant authority. Now whenever a person who wants to make the
contact with the person who is considered as the accountant of the company. Definitely the
accountant cannot be authorized to transfer the property of the company. Even then if that
person comes into the contact with the company on behalf of that accountant. Then definitely
the contact cannot be considered to be valid and in this connection the benefit of doctrine
indoor management cannot be given to a person who wants to make the contact with the
company.

6. EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT –

Fifth is an act out side apparent authorities. Now any person enters into a contact with a
company through its officers not authorized to act on behalf of the company. If any person
who deals with the person on behalf of the company and that person is not authorized by the
company to act on behalf of the company. In this case if anything has taken place for that
purpose the out siders cannot be given the benefit of doctrine of indoor management. Because
in this connection, the person who wants to deal with the company is well expected to know
whether who is representing the company is authorized by the company to act on behalf of
the company or not.

Now, in this connection this case is very important; Credit banks v/s Synicose Ltd. The
articles of association of a company contains the 8 provisions that director may authorize any
person to draw sign and accept the bill of exchange on behalf of the company. It means the
director has got power to authorize any person to accept bill on behalf of the company. Now
this right to we can say draw and accept the bill can be delegated by the company to any
person who is representing on behalf of the company. Branch manager without authority
signed and endorse some bills of exchange. Now, so far as the branch manager is concerned,
he is representing the company but he has not been authorized by the directors to make the
bills and to endorse on behalf of the company.

Now in this connection, a company was not liable on these bills. Because a person who has
received the bills from the company has not comes into the contact of the articles of
association. In which there was a provision that the power which is delegated by the company
to other person. On behalf of the company to except the bills has been delegated or not. It
should be well known by a person, who wants to deal with the company. Now we discuss the
six points, act ultra-vires the company itself. Now there are so many powers; which are
confined on the directors and they can do within their power given under the articles of
association and memorandum of association. Then there is no problem to act on behalf of the
company by the directors. But sometimes what happens? Some works has been done by the
directors which are beyond their authorities.

But that can be rectified by the company in proper. We can say meetings and proper we can
say committees. But some act has been done by the company, which are itself ultra-vires a
company. We can say which are well beyond the authorities of the company; in this
connection this act cannot be rectified. Therefore, any liability arising on that account for that
liability. The company cannot be held responsible and in case the benefit of indoor
management cannot be given to the outsider who deals with the company. In this connection;
this case is very important and pacific course coal mind cases and that was held in that
particular case.
 Conclusion

The approach of Constructive Notice was so radically inclined to support the Company that
the reactions to it all came to support, almost phanatically, the third parties. While
Constructive Notice Blindly supported the company to an illimitable extent, the rule of indoor
management supported the third party just as blindly. Finally, law of agency was required to
repair that damage as was seen in various cases where ostensible authority became a pre-
requisite for the application of indoor management rule.

This is the position in common law until the sudden arrival of Companies act 1989, that
suddenly decided to introduce several conflicting provisions to abolish constructive notice.
Almost, as if giving a second thought, the English parliament never brought Section 711A
into force or there might have been Himalayan difficulties in interpretation and application
of this provision that bit on its own tail.

Contract this common law muddle with the Indian law, where the Companies act 1913
expressly endorsed the indoor management rule. Later, although the 1956 act did not contain
any such analogous principles, the Indian law seems to treat the directors as fiduciaries or
trustees of the company and so long as their acts are benefitting the company, they bind the
company. This principal is further enforced by the provisions of the Indian Contract act,
related to agency, wherein it was held that agents’ power is to do anything lawful to achieve
the object of agency and also that agents can do any legal thing they like, if there is an
emergency, to prevent losses to the principle.

Thus, except for a rare breed of cases where constructive notice was applied, Indian courts
have been immune to useless complications in the form of constructive notice and
consequently Indoor management.