Doctrine of indoor management which is also known as Turquand rule is an ancient rule as it has been used for the past 150 years.
This doctrine was found in 1856 from the landmark case of the royal British bank versus Turquand this doctrine of indoor management was formed and it focuses on the appointment of managing directors and the secretary that is the head of the association.
In the case given above it was seen that one can claim a loan on bonds and it should be repaid on the specific dates but the receiver refuses to repair the amount then the issue a cheque with two signatures of two directors along with the secretary but it comes in light that the government does not appoint all the directors and secretaries and the check is cancelled. So, the cheque receiver filed a case in opposition to the company and by keeping this situation in mind, the companies act 2013 strongly supported the doctrine of indoor management of a company is compulsory.
The Doctrine plays an important role in every company as it focuses on all the articles memorandum of association for every transaction and its specifies people who entered into the contract recently to be aware of these articles and memorandum of association.
ESTABLISHMENT OF THE DOCTRINE
The Turquand rule wasn't accepted as being firmly well established in law until it was approved in the case of House of Lords in Mahoney versus East Holy ford Mining Co. In this case, It was included in the company’s article that a cheque should be signed by 2 of the 3 directors and also by the secretary. But in this case, the director who signed the cheque was not well appointed. The court said that if the director was well appointed or not it comes under the indoor management of the company and the third party who receives the cheque were entitled to presume that the directors had been well appointed and cash cheques.
EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT
The exceptions to indoor management are as follows: -
1.Where the outsider had knowledge of irregularity – The rule won't apply if the person addressing the company contains a slight knowledge about the dearth of authority of the one that is performing on behalf of the company during this situation the doctrine won't apply.
2.No knowledge of memorandum and articles again, the rule can't be invoked by an individual on the bottom that he doesn’t have the knowledge of the memorandum and articles and thus he did depend upon them.
3.Forgery: - This doctrine doesn't apply to the transaction involving forgery or illegal or transactions which are void initially. Within the case of the cast transaction, there's a scarcity of consent. Here the question of consent cannot arise because the person whose signature is forged, he's not even alert to the transaction.
In the case of Rouben v. Great Fingal Consolidated, Here the secretary of the company forged the signature of two of the administrators and issued the certificate without the authority. The difficulty of the certificate requires the signatures of two directors as given within the article. Held here the holder of the certificate cannot take the advantage of the doctrine because it was forged transaction which is void initially.
LAKSHMI RATAN COTTON MILLS CO. LTD, V. J. K. JUTE MITTS CO. LTD
In this case, the company of plaintiff sued defendant’s company for the entire amount of Rs.1,50,000. The defendant company raised the argument that no such resolution sanctioning the loan was elapsed the board of directors, thus it's not binding on the company.
The court held that: -
“If it's found that the transaction of the loan into which the creditor is entering isn't prohibited by the charter of the company or its articles of association and will be entered into on behalf of the company by the person negotiating it, then he's entitled to presume that each one the formalities required in connection therewith are complied with.
“If the transaction in query might be authorized by the passing of a resolution, such an act may be a mere formality. A factual creditor, within the absence of any suspicious circumstances, is entitled to presume its existence. A transaction entered into by the borrowing company under such circumstances cannot be defeated merely on the bottom that no such resolution was after all passed. The passing of such a resolution could be a mere matter of indoor or internal management and its absence, under such circumstances, can't be accustomed defeat the just claim of a true creditor.
“A creditor who is an outsider or the 3rd party and an innocent stranger is entitled to proceed on the belief of its existence and isn't expected to understand what happens within the doors that are closed to him. Where the act is not ultra vires the act or the company such a creditor would be entitled to assume the apparent or ostensible authority of the agent to be a true or genuine one. He could assume that such an individual had the facility to represent the company, and if he, in fact, advanced the cash on such assumptions, he would be protected by the doctrine of internal management.
OFFICIAL LIQUIDATOR, MANASUBE & CO. (P.) LTD. V. COMMISSIONER OF POLICE
In this case, It is expected from the person who he will read the article and memorandum when he enters into a contract with the company, but it's highly unlikely that he will inspect the legality, propriety, and regularity of acts of directors.
In a current judgment, Indian courts had widened the scope of the doctrine. The thing continues to be the identical, to safeguard the third party who acted in straightness with the company and is unaware of the interior management of the company.
The Turquand rule has subsequently been applied in many Indian cases for safeguarding the interest of the third parties against the businesses. In due course of your time, for the right application of this doctrine, several exceptions have emerged to serve the aim of the doctrine within the era like knowledge of irregularity, forgery, acts done beyond the scope of the apparent authority, etc. which strikes a balance in providing reasonable protection to both, the outsiders to the company and also the company.