Doctrine of Indoor Management :
The aforesaid doctrine of constructive notice does in no sense mean that outsiders are deemed to have notice of the internal affairs of the company. For instance, if an act is authorised by the articles or memorandum, an outsider is entitled to assume that all the detailed formalities for doing that act have been observed. For example, the directors of R.B.B. Ltd. gave a bond to T. The articles empowered the directors to issue such bonds under the authority of a proper resolution. In fact, no such resolution was passed. Notwithstanding that, it was held that T could sue on the bonds on the ground that he was entitled to assume that the resolution had been duly passed [The Royal British Bank vs. Turquand [1956] 6E & B 327.] This is the doctrine of indoor management, popularly known as Turquand Rule, which is the only limitation to the doctrine of constructive notice discussed above.
Exceptions: Thus, you will have noticed that the aforementioned rule of Indoor Management is important to persons dealing with a company through its directors or other persons. They are entitled to assume that the acts of the directors or other officers of the company are validly performed, if they are within the scope of their apparent authority. So long as an act is valid under the articles, if done in a particular manner, an outsider dealing with the company is entitled to assume that it has been done in the manner required. The above mentioned doctrine of Indoor Management or Turquand Rule has limitations of its own. That is to say, it is inapplicable to the following cases, namely:
(a) The rule does not protect any person when the person dealing with the company has notice, whether actual or constructive, of the irregularity [Moris vs. Kenssen (1946) A.C. 459; Devi Ditta Mal vs. The Standard Bank of India (1972) I.C. 568]. Thus director of a company cannot normally claim the benefit of the rule in the Turquand Case where he is also acting for the company in the transaction.
(b) The doctrine in no way, rewards those who behave negligently. Where the person dealing with the company is put upon an inquiry, for example, where the transaction is unusual or not in the ordinary course of business. When a sole director and principal shareholder of a company paid into his own account with a bank a cheque drawn in favour of the company, the said bank was held to be put upon an enquiry and the bank could not rely upon the ostensible authority of the director [Underwood vs. Bank of Liverpool (1924) I.K.B. 775]. Likewise, a person who deals with a company may be put upon enquiry by reason of the unusual magnitude of the transactions having regard to the position of the agent who is acting for the company, [Houghom & Co. vs. Nothard Lowe & Wills (1917) 2 KB. 147, 149; Rama Corporation Ltd. vs. Proved Tin & General Investments Ltd. (1952) 2 K.B. 147, 152].
The company documents “are open to all who are minded to have any dealing whatsoever with the company and those deal with them just be affected with notice of all that is contained in those two documents. After that all that the directors do with reference to what it may call the indoor management of their own concern, is a thing to them only; subject to this observation, that no person dealing with them has a right to suppose that anything has been or can be done that is not permitted (by the company’s documents, namely memorandum or articles). When there are persons conducting the affairs of the company in a manner which appears to be perfectly consonant with the articles of association then those dealing with them externally are not to be affected by any irregularities which may take place in the internal management of the company”, says Lord Hatherly in Mahony vs. East Holyford Mining Co. [1875] L.R. 7 H.L. 869.
(c) When an instrument purporting to be executed on behalf of the company is a forgery. The doctrine of indoor management applies only to irregularities which might otherwise affect a transaction but it cannot apply to forgery which must be regarded as nullity [Ruben vs. Great Fingal Consolidated (1966) A.C. 439: Official Liquidator vs. Commr. of Police (1969) I Comp. L.J. (Mad.)].
In view of the exceptions discussed above the rigidity of the doctrine of constructive notice is appreciably elastic. Therefore, if the doctrine of indoor management is at all a silver lining, it is only a slender silver lining of a rather dense cloud.
A critical examination of the statement that the memorandum and articles of association of a company cannot be altered except with the Tribunal permission: It would be evident from the under-mentioned discussion on the provisions of law that such blanket statement is not correct.
According to Section 13 of the Companies Act, 2013 the conditions in the memorandum of a company can be altered only in the cases, in the mode and to the extent for which express provision is made in the Act. For changing the place of registered office of the company from one State to another and its objects, a special resolution and the confirmation of the alteration by the Central Governement are necessary [Section 13], .The change of name by a company also requires a special resolution and the approval of the Central Government [Section 13]. Even for the alteration of the company’s share capital in the shape of increasing, consolidating, sub-dividing, cancellation under section 61 specifically states that confirmation by the Tribunal is required. Only in the matter of reduction of share capital, confirmation by the Tribunal has been prescribed by Section 66.
In the matter of alteration of articles, Section 14 requires only a special resolution for the purpose, and if such resolution has the effect of converting a public company into a private company, the proviso thereto requires the approval of the Tribunal for its operation.
It is thus clear that the headline statement, unqualified as it is, cannot be said to be correct.