INTRODUCTION
Companies are guided by various doctrines and rules to manage their workings and to protect the their interest. These measures make sure that everyone abides by the guidelines and rules of the company.
Here we are going to discuss the Doctrine of Indore Management or The Turquand Rule. It is a 150-year-old concept[1] which protects the interests of the outsides from the actions done by the company. This doctrine came in the context of Doctrine of Constructive Notice. Doctrine of Indoor Management reflected in Section 290 of The Companies Act, 1956, deals with protecting the outsiders from the company while the Doctrine of Constructive Notice dealt in section 399 which protects the company from the outsiders[2].
A company has the obligation to make sure that every internal regulation from its Memorandum of Association and Articles of Association is respected when it comes with dealing with third parties[3]. This rule however relieves the third parties from inquiring about if the company they intend to contract with has complied with all the internal regulations. In other words, this rule helps anyone entering into a contract with the third party to rely on external documentation rather than investigating internal affairs[4]. It can be assumed that the internal process has been followed and met if the external documentations appear valid. However, a person cannot claim for the protection under this doctrine if he already knows that there is mismanagement in the internal affairs.
Turquand rule protects the innocent third parties who are willing to contract with the company in good faith from burden of verifying every internal affair. It gives legal protection to them seamless commercial interactions.
ORIGIN
This doctrine has been originated from the landmark case of Royal British Bank vs. Turquand[5].
The Royal British Bank had lent a loan to a company called Cameron’s Coal Brook, Coal and Swansea and Loughor Railway Company. They later became insolvent. Turquand was the company’s liquidator. The bank was given 2000 pounds by the company which was used to secure it withdraws from its checking account, while the two directors and the secretary signed the bond under the company’s seal. When the company was sued for the non-payment, they alleged that according to there Article of Association the directors have the power to borrow the amount authorised by a general meeting of the board of the company. The bank did not check whether such resolution was passed by the company of not. Sir Jervis of the Courts of Exchequer Chamber ruled in favour of the Royal British Bank and held that the bond was valid and the bank can enforce the terms. The court held that it was valid that the bank was not aware of the internal resolutions as it was not officially registered. The dealing with Mr. Turquand was also held valid was he was the official liquidator on behalf of the company. The court ruled that the third party is not required to go through the internal affairs unless there are clear sings of irregularities.
This decision establishes the “Indoor management rule” or the Turquand rule with protects the third party from dealings with the internal matters of a company.
So, the fundamental principle of this rule is the protection of the third party and the assumption that the company has complied with the internal ongoings if the external documentations shown valid.
EXCEPTIONS
Knowledge of Irregularity
This rule does not apply if the third party has even a slight of knowledge of irregularity. They cannot seek protection under this article if they have noticed constructive or actual irregularity in the internal management of the company’s affairs.
In the case of T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon & Co. Ltd[6]., Company A had lent Company B money to mortgage its assets. But both the companies failed to follow the proper procedure mentioned the Articles. The board of directors for both the companies were also identical. The court held that the creditor was aware of the irregularity and therefore the transaction was not binding.
Suspicion of Irregularity
If any person while dealing with companies have any suspicion around the contract then that person should take the liberty to enquire into it.
In the case of Anand Bihari Lal V Dinshaw & Co, (1946)[7], the court stated that the plaintiff who accepted the transfer of property from an accountant should have acquired a copy of power of attorney to check the authority of the accountant. The transfer therefore deemed void.
Forgery
Forged documents made by the officers cannot make the company liable. This doctrine doesn’t protect the outsiders from the forged documents made n the name of the company. Transactions made through forgery is void ab initio.
In the case of Ruben v Great Fingall Consolidated (1906)[8], the Company Secretary had forged signatures of the two Company Directors on the certificates issued under the name of the company. The plaintiff argued that as this is an internal matter the company will be held liable. However, the court held that this done not fall under the protection of the Doctrine of Indoor Management, and the company would not be held liable.
Acts done beyond authority
Acts done which exceeds beyond the authority of the company’s officer will not make the company liable.
In the case of Sri Krishna v. Mondal Bros. & Co (1964)[9], highlights that the manager of the company had actual authority to borrow funds though he didn’t deposit them into the company’s strong box; so, it was held that since the officer of the corporation indulged in some fraud which led to the creditor’s claim being made in good faith against it then this liability could not be denied by such a corporation.
LANDMARK JUDGMENTS
- Lakshmi Ratan cotton mills co. ltd, v. j. k. jute mitts co. ltd (1957)[10]
This case illustrates the application of Turquand Rule. The Jute Mill’s directors entered into a transaction with the defendant and borrowed an amount which exceeded the amount approved in the internal resolution. The court by applying Turquand rule held that the plaintiff had no knowledge of the internal limitations and acted in good faith.
- Official Liquidator, Manasuba & Co. (P) Ltd. v. Commissioner of Police[11]
In this case the company Manasubha was liquidated and the official liquidator was in charge of all the affairs. The police had seized certain documents on the suspicion of irregularities. The Liquidator however sought to recover those files. The court using the Turquand rule held that the official Liquidator acted as a third party and assumed that all the internal management of the company was in order.
CONCLUSION
The indoor management rule or Turquand rule thus protects the third parties from the burden of due diligence of the company’s internal matters and protects and also makes the company liable for its internal management. It enhances trust and confidence, ensuring efficiency within the management of a company.
- Doctrine of Indoor Management (no date) cleartax. Available at: https://cleartax.in/s/doctrine-indoor-management (Accessed: 22 June 2024).
- LawBhoomi (2024) Doctrine of Indoor Management in company law, LawBhoomi. Available at: https://lawbhoomi.com/doctrine-of-indoor-management-in-company-law/ (Accessed: 22 June 2024). ↑
- Royal British Bank v turquand (2024) Wikipedia. Available at: https://en.wikipedia.org/wiki/Royal_British_Bank_v_Turquand (Accessed: 22 June 2024). ↑
- Doctrine of Indoor Management (no date) cleartax. Available at: https://cleartax.in/s/doctrine-indoor-management (Accessed: 22 June 2024).
- Royal British Bank v turquand (2024) Wikipedia. Available at: https://en.wikipedia.org/wiki/Royal_British_Bank_v_Turquand (Accessed: 22 June 2024).
- LawBhoomi (2024) Doctrine of Indoor Management in company law, LawBhoomi. Available at: https://lawbhoomi.com/doctrine-of-indoor-management-in-company-law/ (Accessed: 22 June 2024). ↑
- Anand Behari Lal vs Dinshaw and co. on 25 October, 1945. Available at: https://indiankanoon.org/doc/201462/ (Accessed: 22 June 2024). ↑
- Ruben and Ladenberg v. Great Fingall Consolidated Co., 44 SLR 616: United Kingdom House of Lords, Judgment, law, Casemine.com (no date) https://www.casemine.com. Available at: https://www.casemine.com/judgement/uk/5a8ff8c860d03e7f57ecd4f1 (Accessed: 22 June 2024). ↑
- (No date a) Indian kanoon – search engine for Indian law. Available at: https://indiankanoon.org/ (Accessed: 22 June 2024). ↑
- Pratiksha Hinge, ‘Doctrine of Indoor Management and Landmark Judgements’ (LegalEagle, 14 May 2021) https://www.legaleagle-lawforum.com/forum/academic-articles/doctrine-of-indoor-management-and-landmark-judgements accessed 22 June 2024. ↑
- Ibid ↑
