Doctrine Of Indoor Management And Ultra Vires 382j3t

Indoor Management The Doctrine of indoor management is a presumption on the part of the people dealing with the company such as the shareholders that the internal requirements with regard to the articles of association and memorandum of association have been complied with. The doctrine helps in protection of external from the company and states that the people are entitled to presume that the internal proceedings are as per the documents submitted with the registrar of companies. They are not allowed to go into the procedural aspect, such as the fact that the internal proceedings might not happen regularly, or what are the proceedings before the directors, in an extraordinary general meeting. „Doctrine of Indoor Management‟, popularly known as the Turquand‟s Rule initially arose from 150 years ago in the context of the „Doctrine of Constructive Notice‟. The rule of the doctrine of indoor management is opposed to the rule of constructive notice. The latter seeks to protect the company against the outsider while the former seeks to protect the outsiders against the company. The rule of constructive notice is confined to the external position of the company, and therefore, it follows that there is no notice as to how the company‟s internal machinery is handled by its officials. If the contract is consistent with the public documents, the person contracting will not be prejudiced by irregularities that may beset the indoor working of the company. The Doctrine of Indoor Management lays down that persons dealing with a company having satisfied themselves that the proposed transaction is not in its nature inconsistent with the memorandum and the articles, are not bound to inquire the regularity of any internal proceeding. In other words, while persons contracting with a company are presumed to know the provisions of the contents of the memorandum and articles, they are entitled to assume that the officers of the company have observed the provisions of the articles. It is no part of duty of any outsider to see that the company carries out the requisite internal proceedings. It is important to note that the rule of constructive notice can be invoked by the company and it does not operate against the company. It operates against the person who has failed to inquire but does not operate in his favour.

EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT The rule is now more than a century old. In view of the fact that companies having come to occupy the central position in the social and economic life of modern communities, it was expected that its scope would be widened. But the course of decisions has made it subject to the following exceptions:

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Knowledge of Irregularity Where a person dealing with a company has actual or constructive notice of the irregularity as regards internal management, he cannot claim the benefit under the rule of indoor management. He may in some cases, be himself a part of the internal procedure. The rule is based on common sense and any other rule would “encourage ignorance and condone dereliction of duty”. Some instances in this regard are as follows: T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon & Co. Ltd. Company A lent money to Company B on a mortgage of its assets. The procedure laid down in the Articles for such transactions was not complied with. The directors of the two companies were the same. It was held in this case that the lender had notice of the irregularity and hence the mortgage was not binding. A transfer of shares in a company was approved by two directors. One of these directors was not validly appointed. The other was disqualified by reason of being the transferee himself. These facts were known to the transferor. It was held in this case that the transfer was ineffective.

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Negligence Where a person dealing with a company could discover the irregularity if he had made proper inquiries, he cannot claim the benefit of the rule of indoor management. The protection of the rule is also not available where the circumstances surrounding the contract are so suspicious as to invite inquiry, and the outsider dealing with the company does not make proper inquiry. If, for example, an officer of a company purports to act outside the scope of his apparent authority, suspicion should arise and the outsider should make proper inquiry before entering into a contract with the company.

Anand Bihari Lal v. Dinshaw & Co. The plaintiff, in this case, accepted a transfer of a company‟s property from its ant. It was held in this case that the transfer was void as such a transaction was apparently beyond the scope of the ant‟s authority. The plaintiff should have seen the power of attorney executed in favour of the ant by the company. 

Forgery The rule in Turquand’s case does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers. The leading case on this point is: The plaintiff was the transferee of a share certificate issued under the seal of the defendant company. The certificate was issued by the company‟s secretary, who had affixed the seal of the company and forged the signatures of two directors. The plaintiff contended that whether the signatures were genuine or forged was a part of the internal management and, therefore, the company should be estopped from denying genuineness of the document. But it was held that the rule has never been extended to cover such a complete forgery. Lord Loreburn said “It is quite true that persons dealing with limited liability companies are not bound to inquire into their indoor management and will not be affected by irregularities of which they have no notice. But this doctrine, which is well established, applies to irregularities which otherwise might affect a genuine transaction. It cannot apply to a forgery”. This statement has been regarded as a dictum, as the case was decided on the principle that the secretary did not have actual or implied authority to represent that a forged document was genuine and, therefore, there was no estoppel against the company. Hence, a general statement that the Turquand Rule does not apply to forgeries is not exactly warranted by the present authorities.

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Representation through Articles This exception deals with the most controversial and highly confusing aspect of the Turquand Rule. Articles of association generally contain what is called the “power of delegation”.

Lakshmi Ratan Cotton Mills v. J.K. Jute Mills Co. This case explains the meaning and effect of a delegation clause. One G was a director of a company. The company had managing agents of which also G was a director. Articles authorized directors to borrow money and also empowered them to delegate this power to any one or more of them. G borrowed a sum of money from the plaintiffs. The company refused to be bound by the loan on the ground that there was no resolution of the board delegating the power to borrow to G. Yet the company was held bound by the loan. Thus the effect of a delegation clause is that a person who contracts with an individual director of a company, knowing that the board has power to delegate its authority to such an individual, may assume that the power of delegation has been exercised. 

Acts outside the scope of apparent authority If an officer of a company enters into a contract with a third party and if the act of the officer is beyond the scope of his authority, the company is not bound. In such a case, the plaintiff cannot claim the protection of the rule of indoor management simply because under the Articles the power to do the act could have been delegated to him. The plaintiff can sue the company only if the power to act has in fact been delegated to the officer with whom he has entered into the contract. Kreditbank Cassel v. Schenkers Ltd. A branch manager of a company drew and endorsed bills of exchange on behalf of the company in favor of a payee to whom he was personally indebted. He had no authority from the company to do so. It was held that the company was not bound. But if an officer of a company acts fraudulently under his ostensible authority on behalf of the company, the company is liable for his fraudulent act. Sri Krishna v. Mondal Bros.& Co. The manager of a company had the authority under the Memorandum and the Articles of the company to borrow money. He borrowed money on a hundi but did not place the money did not place the money in the coffers of the company.

It was held that the company was bound to honour the hundi. It could not defeat the bona fide claim of the creditor for recovery of the money on the ground of fraud of its own officer. DOCTRINE OF CONSTRUCTIVE NOTICE Every outsider dealing with a company is deemed to have notice of the contents of the Memorandum and the Articles of Association. These documents, on registration with the Registrar, assume the character of public documents. This is known as „constructive notice‟ of Memorandum and Articles. The Memorandum and the Articles are open and accessible to all. It is the duty of every person dealing with a company to inspect these documents and see that it is within the powers of the company to enter into the proposed contract. Likewise special resolutions, when ed with the Registrar, become public documents, so that an outsider is on notice of their contents in the same way as he is of the Articles and the Memorandum. Thus, anyone dealing with a company is presumed not only to have read the Memorandum and the Articles but to have understood them properly. Kotla Venkatswamy v. C. Rammurthi The Articles of Association of a company contained a clause that all deeds and documents of the company shall be signed by the managing director, the secretary and a working director on behalf of the company. A deed of mortgage was signed by the secretary and a working director only. It was held that the mortgage could not be enforced as the illegality appeared on the face of the deed, and therefore, the deed was invalid notwithstanding that plaintiff acted in good faith and money was applied for the purposes of the company. The doctrine of constructive notice of the Memorandum and Articles, however, is not a positive doctrine but a negative one. It is like doctrine of estoppels. It does not operate against the company. It operates only against an outsider dealing with the company. It prevents him from alleging that he did not know that the Memorandum and Articles rendered a particular act ultra vires the company.

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ultra vires is a Latin phrase meaning literally "beyond the powers", although its standard legal translation and substitute is "beyond power". If an act requires legal authority and it is done with such authority, it is characterised in law as intra vires (literally "within the powers"; standard legal translation and substitute, "within power"). If it is done without such authority, it is ultra vires. Acts that are intra vires may equivalently be termed "valid" and those that are ultra vires "invalid". There are two types of 'Ultra Vires'. Procedural Ultra Vires: When a piece of delegated legislation is deemed to have not followed the correct procedure which was required by the enabling act. (Aylesbury Mushroom Case 1972) Substantive Ultra Vires: When a piece of delegated legislation is deemed to be void because it places provisions on an area over which the enabling act did not give them the power to. (Strickland V Hayes BC) EXCEPTIONS TO THE DOCTRINE OF ULTRA VIRES There are, however, certain exceptions to this doctrine, which are as follows: 1. An act, which is intra vires the company but outside the authority of the directors may be ratified by the shareholders in proper form.20 2. An act which is intra vires the company but done in an irregular manner, may be validated by the consent of the shareholders. The law, however, does not require that the consent of all the shareholders should be obtained at the same place and in the same meeting. 3. If the company has acquired any property through an investment, which is ultra vires, the company‟s right over such a property shall still be secured. 4. While applying doctrine of ultra vires, the effects which are incidental or consequential to the act shall not be invalid unless they are expressly prohibited by the Company‟s Act. 5. There are certain acts under the company law, which though not expressly stated in the memorandum, are deemed impliedly within the authority of the company and therefore they are not deemed ultra vires. For example, a business company can raise its capital by borrowing. 6. If an act of the company is ultra vires the articles of association, the

company can alter its articles in order to validate the act.