Doctrine of indoor management.

 

1.                                    1.Concept.

·       That doctrine of indoor management safeguards the interest of 3^rd party /outsiders to company by imposing liability on company and directors.

·       because as according to the point of MOA and AOA both are public documents of company so must in knowledge of outsider when they deals with company otherwise they would be liable for their negligence but what about the all those matters of the company which are discussed in general meeting of company and all matters that are discussed within their members

·       in short how that is possible for the outsider to have knowledge about the company acts behind the closed door that matters he cannot know as the man of ordinary prudence until not bring into his knowledge by the company members .

·       So that doctrine imposes liability on company members and company of not delivering their internal matter information to outsider and secure outsider and make them liable.

2.                      2. Origin.

·              from beginning to until both business needs and society complexity expend and in the same

                 way problems also increase so law also need to be modified to tackle all that issue

·             that’s why as doctrine of ultra vires and veil and constructive notice are present secure company            so there also need one doctrine that safeguard interest of outside parties that’s deals with company .       So that rule /doctrine originate in that case law.

·       Royal British Bank v. Turquand (1856),

 

a.    Facts.

·       In that case the director of company borrowed money from outsiders by issuing the board.

·       And the director of company has the authority to fund rising in the form of bond and that authority are specified in the AOA of company.

·       And the resolution also passed by company in the favor of such authority of issue bond in the form of fund raising.

·       But how much amount director has authority to issue bond, that amount is not specified.

·       So director of company issue bond of 20,000 pounds to 2 outsiders.

·       And on the question of outsider ,is they have authority to issue bond of such amount verified that yes they have such authority

·       But, actually after issue of bond the director not get approval from shareholder.

               B. issue.

          The issue arises whether director has authority to issue such amount of bond or if not then who              would liable to bear consequences company, director or outsiders /3^rd party.

              c.  judgment /decision.

       the decision held that as that is not clearly mentioned in AOA of company that on how much                  amount the director has authority to issue bond such type of matters are decide in company

     general meeting so that are internal affairs of company and outsider not know until information              provided to them so outsider not liable to bear the consequences of the fault of company and                   company liable here for their director action.

3.    3.Meaning.

Indoor management ‘’meaning ‘’management of internal relation between shareholder and board of director of company.

4.    4.Definition.

This doctrine deals with the internal relation between the shareholder and board of director of company so according to this doctrine 3^rd party liable just for the consequences of their own negligence not for the internal dealings between the members of company.

5.    5.Case reference.

·       Freeman and Lockyer v. Buckhurst Park Properties Ltd. (1964)

The defendant company dealt with the purchase and sale of land. The company was founded by A & B who nominated a director each and together four of them formed the Board of Directors. As per the Articles of Association of the company the board was to nominate a name from the board itself, for the position of a Managing Director. The board failed to do so and a started acting as the Managing Director of the company. Subsequently, the company hired the plaintiff company for architectural and surveying services. The plaintiff firm after the completion of their services asked for their fees but the defendant firm denied because of its omission to appoint a Managing Director.
The court relied on the decision of Royal British Bank v. Turquand and held that the defendant company was liable to pay the plaintiff firm for their services as they cannot make to suffer because of the irregularity which took place in the management of the company.

 

6.    6.Significance.

1.    Safeguard outsider.

·       As doctrine of constructive notice ,ultra vires and veil are secure company against 3^rd party and their directors exceed authority and unlawful act but that doctrine is supreme because that safeguard the interest of outsider against company by imposing liability on company and their directors and compensate outsiders for the acts in which their no fault are found

·       Like that is impossible for outsider to have knowledge about of internal affairs of members of company until information deliver to them.

7.    7.Consequences of applicability.

a.    Not negligence of outsiders.

·       To implement doctrine of indoor management that is necessary that the matter must be relate to the internal dealings of members of company so that will not count as outsider negligence

·       But if negligence proved then constructive notice would apply.

8.    8.Exception.

1.    Knowledge of irregularity.

That is the situation when the person has the actual knowledge about the all affairs of company either external or internal like director has knowledge all about the affairs of company so on that exception he would not avail the advantage of indoor management on ground of knowledge of irregularity.

·       Illustration.

If the company director borrowed loan from 3^rd party by issue bond of worth about 10,000 pounds and knew that company not give him authority of about such amount so 3^rd party would be compensate on ground of indoor management .

2.    Suspicious of irregularity.

·       That is the situation when the person has the suspicious about of the knowledge that bring into his knowledge

·       and that information can be inquired which bring into his knowledge

·       and can prevent himself from fraud  by using prudence

So on the basis of this fact that doctrine of indoor management would not implement.

This can be better understood from the case of Anand Bihari Lal v. Dinshaw & Co. (1946) Here, the plaintiff bought a property from the defendant through their accountant without enquiring whether the accountant had power of attorney or not. The accountant had acted beyond the scope of its authority and the same could have come to the notice of the plaintiff if he had acted prudently. As a result, the court held that the transfer was void.

 

3.    Forgery.

Forgery is the situation when the dealing is made with another party by making forged document by false sign so, if the some company agent or officer made contract with 3^rd party by showing himself director so as the result of fraud act of company members outsider would not be liable and not company liable because of unlawful act of its company members here in that situation corporate veil doctrine implement.

·       Case reference.

·     Ruben and Ladenberg v Great Fingall Consolidated Co: HL 19 Jul 1906

The appellants in good faith advanced a sum of money to the secretary of a company for his private purposes on the security of a share certificate of the company. The certificate was in point of form correct, bearing the seal of the company, and appearing to be signed by two of the directors and countersigned by the secretary. The seal of the company was however affixed to it fraudulently by the secretary and without authority, and the signatures of the two directors were forged by him.
Held that the company was not estopped from pleading the invalidity of the certificate, and were not responsible to the appellants for the loss they had sustained through the fraud of the secretary.

9. Legal consequences.

1. Compensate outsider.

·       As doctrine of constructive notice ,ultra vires and veil are secure company against 3^rd party and their directors exceed authority and unlawful act but that doctrine is supreme because that safeguard the interest of outsider against company by imposing liability on company and their directors and compensate outsiders for the acts in which their no fault are found

·       Like that is impossible for outsider to have knowledge about of internal affairs of members of company until information deliver to them.

Ø Reference.

Under section 38 of companies act 2017 if the company contravenes its provisions of AOA then company and every officer of company shall be liable to penalty not exceeding of level 1 on the standard scale .

10. Conclusion.

 

After all of the above discussion the doctrine of indoor management work against the other doctrine as these doctrine secure company against the 3^rd party and from its members unlawful acts that doctrine secure outsider from company members unlawful acts.

But to avail the opportunity of indoor management doctrine the negligence of outsider party must not present and matter of dispute must relate to internal affairs of company members which harsh to know the outsider without conveying to him by company members and by applying prudence.