I. Doctrine Explained:
The memorandum and articles of the Company become a public document after they are registered by the Registrar of Companies, therefore, any person intending to deal with the Company may have access to these documents and obtain copies thereof. Thus, he will be deemed to have constructive notice of the contents of the memorandum and/or articles.
However, there is an exception to this rule of constructive notice. This exception is known as 'Doctrine of Indoor Management'. It was for the first time enunciated in:
Case: Royal British Bank v. Tarquand
It is important to note that the "Doctrine of Constructive Notice' can be invoked by the Company and it does not operate against the Company.
Instead it operates against the person who has failed to inquire and does not operate in his favour.
On the other hand 'Doctrine of Indoor Management' can be invoked by the person dealing with the Company and cannot be invoked by the Company.
An outsider is entitled to act on a certified copy of the resolution of the Board of Directors delegating the powers of borrowing money to the Managing Director subject to the invitations therein.
Case: Premier Industrial Bank Ltd. v. Carlton Manufacturing Co. Ltd.
Held: Elaborating the implications of the Doctrine of Indoor Management, the Court held that, "if the Directors have power and authority to bind the Company, but certain preliminaries are required to be gone through on the part of the Company before that power can be duly exercised, then the persons contracting the Directors are not bound to see that all the preliminaries have been observed."
Justifying the Doctrine of Indoor Management, Gower pointed out that it would be difficult for the creditors and persons dealing with Companies if the Companies could escape liability by denying the authority of the officers to act on its behalf.
It would be pertinent to refer to some of the leading cases on the Doctrine of Indoor Management.
Case: Charnock Colleries v. Bholanath Dhar
Facts: The managing agents of the Company were given power to borrow money for the purposes of the Company with approval of the Directors. The Plaintiff gave a loan to the managing agents, who had not obtained approval of the Directors.
Held: The Company was bound by the loan and the creditor was entitled to assume that the borrowings had the approval of the Directors as it was a matter relating to Indoor Management of the Company.
Case: P.V. Damodara v. Indian National Agencies
Facts: The Director of the Company had the power to allot shares only with the consent obtained in the general meeting but, they allotted them without such consent.
Held: The Plaintiff was justified in assuming that he was allotted the shares with the consent of the general meeting.
Case: Brick and Till Co. Ltd. v. Rawlings
Held: The Company was held bound by the Act of the Chairman who acted as the Managing Director, though he was never appointed as such, in receiving cheques from a customer in payment for goods supplied by the Company.
II. Exceptions to the Doctrine:
1. Where the outsider had the knowledge of irregularity:
The rule does not protect any person who has actual or even an implied notice of lack of authority of the person acting on behalf of the Company. Thus, a person knowing fully well that the Directors do not have the authority to make the transaction, but still enters into it cannot seek protection under the rule of Indoor Management.
2. No knowledge of articles:
Case: Rama Corporations v. Proved Tin & General Investment Co. Held: The rule cannot be invoked in favour of a person who did not consult the memorandum and articles and thus, did not rely on them.
The doctrine in no way rewards those who behave negligently. Thus, when an officer of a Company does something which shall not ordinarily be within its powers, the persons dealing with him must make proper enquiries and satisfy himself as to the officer's authority. If he fails make an enquiry, he is estopped from relying on the rule.
The rule of Indoor Management does not extend to the transactions involving forgery or otherwise void or illegal ab initio. In case of forgery, it is not that there is absence of consent, but there is no consent at all. The persons whose signatures have been forged are not even aware of the transactions and the question of consent does not arise. Consequently, it is not that the title of the person is defective but, there is no title at all.
Case: Ruben v. Great Fingal Consolidated
Held: Where the secretary of a Company forged signatures of 2 of the Directors required under the articles on a share certificate and issued certificate without authority, the applicants were refused registrations as members of the Company. The certificate was held to be nullity and the holder of the certificate was not allowed to take advantage of Indoor Management.
Forgery may further include unauthorised use of a Company's seal.
Case: South London Greyhound Racecourse Ltd. v. Wake
Held: A share certificate bearing the Company's seal and attested by a Director and the secretary was held to be forgery because the affixing of the Company's seal had not been authorised by a resolution of the Board as required by the articles.
The Doctrine of Indoor Management does not apply where the question is in regard to the very existence of an agency.
Case: Varkey Souriar v. Keralecya Banking Co. Ltd.
Held: The Kerala HC held that the doctrine cannot apply where the question is not one as to the scope of the power exercised by an apparent agent of a Company but, is in regard to the very existence of the agency.
Submitted by Pallav Tarnekar