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Doctrine of Indoor Management {Turquand's Rule}

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INTRODUCTION <ul><li>Doctrine of Constructive Notice </li></ul><ul><li>S.610, Companies Act, 1956 </li></ul><ul><li>Meaning: </li></ul><ul><li>Doctrine of Indoor Management </li></ul>

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Relation between the two doctrines Doctrine of Constructive Notice <ul><li>Can be invoked by the company. </li></ul><ul><li>Does not operate against the company. </li></ul>Doctrine of Indoor Management EXCEPTION <ul><li>Can be invoked by the person dealing with the company. </li></ul><ul><li>Operates against the company </li></ul>

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Origin of the doctrine <ul><li>Royal British Bank V. Turquand </li></ul><ul><li>(1856) 119 E R 886 </li></ul><ul><li>Facts </li></ul><ul><li>The Directors of the Company were authorized by the articles to borrow on bonds such sums of money as should from time to time by a special resolution of the Company in a general meeting, be authorized to be borrowed. </li></ul><ul><li>A bond under the seal of the company, signed by two directors and the secretary was given by the Directors to the plaintiff to secure the drawings on current account without the authority of any such resolution. </li></ul><ul><li>Turquand sought to bind the Company on the basis of that bond. </li></ul>

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<ul><li>Issue </li></ul><ul><li>Whether the company was liable on that bond? </li></ul><ul><li>Judgment </li></ul><ul><li>The Court of Exchequer Chamber overruled all objections and held that the bond was binding on the company as Turquand was entitled to assume that the resolution of the Company in general meeting had been passed. </li></ul>Origin of the doctrine

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Provision under companies act <ul><li>S. 290, Companies Act, 1956 </li></ul><ul><li>“ Acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles: </li></ul><ul><li>Provided that nothing in this section shall be deemed to give validity to acts done by a director after his appointment has been shown to the company to be invalid or to have terminated” </li></ul>

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EXCEPTIONS <ul><li>Where the outsider had knowledge of irregularity </li></ul><ul><li>Case-Law : Howard v. Patent Ivory Co. </li></ul><ul><li>No knowledge of memorandum and articles </li></ul><ul><li>Case-Law : Rama Corporation v. Proved Tin & General Investment Co. </li></ul><ul><li>Forgery </li></ul><ul><li>Case-Law : Rouben v. Great Fingal Consolidated </li></ul>

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EXCEPTIONS <ul><li>Where the question is in regard to the very existence of an agency </li></ul><ul><li>Case-Law : Varkey Souriar v. Keraleeya Banking Co. Ltd </li></ul><ul><li>Where a pre-condition is required to be fulfilled before the company itself can exercise a particular power </li></ul><ul><li>Case-Law : Pacific Coast Coal Mines v. Arbuthnot </li></ul><ul><li>Suspicion of irregularity </li></ul><ul><li>Case-Law : B. Anand Behari Lal v. Dinshaw & Co. (Bankers) Ltd. </li></ul>

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Decisions by the Indian courts <ul><li>MRF Ltd. v. Manohar Parrikar (SC) </li></ul><ul><li>Monark Enterprises v. Kishan Tulpule and Ors. </li></ul><ul><li>Lakshmi Ratan Cotton Mills Co. Ltd. v. J.K. Jute Mitts Co. Ltd . </li></ul><ul><li>Diwan Singh v. Minerva Mills </li></ul>

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conclusion <ul><li>The rule was enunciated by the Courts to mitigate the rigors of the Constructive Notice Doctrine. Its importance arises in situations in which the third party’s dealings are with some officer or agent other than the Board. </li></ul><ul><li>The rule protects the interest of the third party who transacts with the Company in good faith and to whom the Company is indebted. </li></ul><ul><li>The gist of the rule is that persons dealing with limited liability companies are not bound to enquire into their indoor management and will not be affected by irregularities of which they had no notice. </li></ul>

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Q & A <ul><li>Company 'A' lends money to Company 'B' on a mortgage of its assets and the procedure laid down in the articles was not complied with and the directors of the two companies were the same. Is the mortgage binding upon Company B? </li></ul><ul><li>The plaintiffs contracted with a director of the defendant Company and gave him a cheque under the contract. The Director could have been authorised under the Company’s articles, but was not in fact so authorized. The plaintiff had not seen the Articles. The Director misappropriated the cheque and the plaintiffs sued the Co. Is the Company liable? </li></ul>

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Q & A <ul><li>A Company issued a bond under its common seal signed by two Directors. The Articles provided that the directors might borrow on bond such sums as they should be authorized by an ordinary resolution of the Company. No such resolution was passed. Is the Co. liable on the bond ? </li></ul>

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THANK YOU MRINALI KAUL IV BSL LLB ILS LAW COLLEGE PUNE