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    Applicability Doctrine Indoor Management

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    Vardhaman Pandey
    The doctrine of indoor management holds that outsiders dealing with a company are entitled to presume that internal requirements of the company's memorandum and articles have been properly followed. It originated in a 1856 case where a company was required to pass a shareholder resolution before issuing bonds, but failed to do so, and the court still allowed the bondholder to recover from the company. The doctrine protects third parties who transact with a company in good faith without needing to inquire into internal proceedings. It also applies to limited liability partnerships as they have a similar separate legal status and also make internal documents available to the public.

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    Applicability Doctrine Indoor Management

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    Vardhaman Pandey
    195 views3 pages
    The doctrine of indoor management holds that outsiders dealing with a company are entitled to presume that internal requirements of the company's memorandum and articles have been properly followed. It originated in a 1856 case where a company was required to pass a shareholder resolution before issuing bonds, but failed to do so, and the court still allowed the bondholder to recover from the company. The doctrine protects third parties who transact with a company in good faith without needing to inquire into internal proceedings. It also applies to limited liability partnerships as they have a similar separate legal status and also make internal documents available to the public.

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    The doctrine of indoor management holds that outsiders dealing with a company are entitled to presume that internal requirements of the company's memorandum and articles have been properly followed. It originated in a 1856 case where a company was required to pass a shareholder resolution before issuing bonds, but failed to do so, and the court still allowed the bondholder to recover from the company. The doctrine protects third parties who transact with a company in good faith without needing to inquire into internal proceedings. It also applies to limited liability partnerships as they have a similar separate legal status and also make internal documents available to the public.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    195 views3 pages

    Applicability Doctrine Indoor Management

    Uploaded by

    Vardhaman Pandey
    The doctrine of indoor management holds that outsiders dealing with a company are entitled to presume that internal requirements of the company's memorandum and articles have been properly followed. It originated in a 1856 case where a company was required to pass a shareholder resolution before issuing bonds, but failed to do so, and the court still allowed the bondholder to recover from the company. The doctrine protects third parties who transact with a company in good faith without needing to inquire into internal proceedings. It also applies to limited liability partnerships as they have a similar separate legal status and also make internal documents available to the public.

    Copyright:

    © All Rights Reserved
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    of 3

    Applicability of Doctrine of Indoor Management to LLP

    Meaning of Indoor Management


    The word in-door suggest the thing which is going on other side of the door i.e. an outsider
    cant see and observe the company internal affairs. The doctrine of Indoor management,
    popularly known as the Turquand's rule initially arose some 150 years ago in the context of the
    doctrine of constructive notice. The doctrine of indoor management is an exception to the rule of
    constructive notice. It imposes an important limitation on the doctrine of constructive notice.
    According to doctrine of Indoor management persons dealing with the company are entitled
    to presume that internal requirements prescribed in memorandum and articles have been
    properly observed.
    Doctrine of Constructive Notice
    Memorandum of Association and Articles of Association are two most important documents
    needed for the incorporation of a company. The memorandum of a company is the
    constitution/charter of a company. On the other hand, the articles of association enumerate
    claim the internal rules of the company under which it will be governed. Section 610 of the
    Companies Act, 1956 provides that the memorandum and articles when registered with
    Registrar of Companies 'become public documents' and then they can be inspected by
    anyone on payment of a nominal fee.
    Therefore, notice about the contents of memorandum and articles is said to be within the
    knowledge of both members and non- directors members of the company. Such notice is a
    deemed notice in case of members and a constructive notice in case of non-members.
    Thus, every person dealing with the company is deemed to have a constructive notice of the
    contents of the memorandum and articles of the company. An outsider dealing with the
    company is presumed to have read the contents of the registered documents of the company.
    The further presumption is that he has not only read and inspected the documents but has also
    understood them fully in the proper sense. This is known as the rule of constructive notice.
    So, the doctrine or rule of constructive notice is a presumption operating in favour of the
    company against the outsider. It prevents the outsider from claiming that he did not know that
    the constitution of the company rendered a particular act or a particular delegation of authority
    ultra vires.

    Origin of the Doctrine of Indoor Management


    The doctrine of indoor management was first laid down in the famous case of Royal
    British Bank v. Turquand. In this case, the directors of a company had issued a bond to
    Turquand.1 They had the power under the articles to issue such bond provided they were
    authorized by a resolution passed by the shareholders at a general meeting of the company. But
    no such resolution was passed by the company. It was held that Turquand could recover the
    1

    (1856) 119 ER 886.

    amount of the bond from the company on the ground that he was entitled to assume that the
    resolution was passed.
    The memorandum and articles of association are public documents, open to public inspection.
    But the details of internal procedure are not thus open to public inspection. Hence, an outsider is
    presumed to know the constitution of a company; but not what may or may not have taken place
    within the doors that are closed to him. 2
    Establishment of the Doctrine
    The rule was not accepted as being firmly well established in law until it was approved by the
    House of Lords in Mahoney v East Holyford Mining Co3. In this case, the company's articles
    provided that cheques should be signed by any two of the three named directors and by the
    secretary, the fact that the directors who had signed the cheques had never been properly
    appointed was held to be a matter of internal management, and the third parties who received
    those cheques were entitled to presume that the directors had been properly appointed, and cash
    the cheques.
    Applicability to LLP
    A Limited Liability Partnership is a body corporate having a separate legal entity4. The
    memorandum and articles of association are the charter of the company, likewise LLP agreement
    is the charter of LLP. LLP agreement provides for activities of the LLP and the internal rules
    which will govern functioning of LLP. Company is an artificial person having separate legal
    entity, LLP is also an artificial person having separate legal entity. All the documents filed by
    Company with Registrar of companies are in public view and anyone can view the documents of
    company, likewise the documents of LLP are also available to public for scrutiny so as to protect
    the interest of partners, creditors, third parties and outsiders dealing with LLP5. The rule should
    protect the interest of the third party who transacts with the LLP in good faith and to whom the
    LLP is indebted. Implication of Doctrine of Indoor management in LLP lays down that persons
    dealing with LLP having satisfied themselves that the proposed transaction is not in its nature
    inconsistent with the LLP agreement and are not bound to inquire into the regularity of any
    internal proceeding. Hence, Doctrine of indoor management should be made applicable to LLP.
    Case Note:
     B Liggett (Liverpool) Ltd v Barclays Bank Ltd6
     Hely-Hutchinson v Brayhead Ltd7
     Rolled Steel Products (Holdings) Ltd v British Steel Corpn8
    2
    3
    4
    5
    6
    7

    Pacific Coast Coal Mines Ltd v Arbuthnot, 1917 AC 607.


    (1875) LR 7 HL 869
    Section 3(1) of the Limited Liability Partnership Act 2008
    Section 36 of the Limited Liability Partnership Act 2008

    [1928] 1 KB 48 (Sealy p 221)


    [1968] 1 QB 549 (Sealy p 224)
    [1986] Ch 246 (Sealy pp 163 and 222)

    
    
    
    

    Varkey Souriar v. Keraleeya Banking Co. Ltd 9


    Lakshmi Ratan Cotton Mills Co. Ltd, v. J. K. Jute Mitts Co. Ltd10
    Official Liquidator, Manasube & Co. (P.) Ltd. V. Commissioner of police11
    Monark Enterprises v Kishan Tulpule and Ors

    1957] 27 Comp Cas 591, 594 ; AIR 1957 Ker 97

    10

    AIR 1957 All 311

    11

    [1968]38 Comp. cas 884 (Mad)

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