Introduction

The doctrine of Indoor management, popularly known as the Turquand’s rule initially arose

some 150 years ago in the context of the doctrine of constructive notice. The rule of Doctrine of

Indoor Management is conflicting to that of the principle of Constructive Notice. The latter seeks

to protect the company against outsiders; the former operates to protect 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 officers. If the contract is consistent with the public document, the person

contracting will not be prejudiced by irregularities that may beset the indoor work 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 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 provisions of

the 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

its own internal regulations.

It is important to note that the notice 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. But the doctrine of “indoor management” can be invoked by the

person dealing with the company and cannot be invoked by the company.

The rule is based upon obvious reasons of convenience in business relations. Firstly, the

memorandum and article of association are public documents, open to public inspection. But the

details of internal procedures are not thus open to public inspection. Hence an outsider “is

presumed to know the constitution of the company; but not what may or may not have taken

place within the doors that are closed to him”1. The wheels of commerce would not go round

smoothly if person dealing with the companies were compelled to investigate thoroughly

1 Pacific coast coal mines Ltd v Arbuthnot, 1917 AC 607.

“The internal machinery of a company to see if something is not wrong”.2 People in business

would be very shy in dealing with such companies.

Yet another reason is explained by gower in these words: “the lot of creditors of limited

company is not a particularly happy one; it would be unhappier still if the company could escape

liability by denying the authority of the officials to act on its behalf”.

The rule is of great practical utility. It has been applied in great variety of cases involving rights

and liabilities. It has been used to cover acts done on behalf of a company by de facto directors

who have never been appointed, or whose appointment is defective, or who, having been

regularly appointed, have exercised an authority which could have been delegated to them under

the company’s articles, but never has been so delegated, or who have exercised an authority

without proper quorum. Thus where the directors of the company having the power to allot

shares only with the consent of the general meeting, allotted them without any such consent;

where the managing directors of a company granted a lease of the company’s properties,

something which he could do only with the approval of the board; where the managing agents

having the power to borrow with the approval of directors borrowed without any such approval,

the company was held bound.

Genesis of the doctrine

2 Dey v pullinger Engg Co, [1921] 1 Kb 77.

The rule had its genesis in the case of Royal Bank v Turquand3. In this case the Directors of the

Company were authorized by the articles to borrow on bonds such sums of money as should

from time to time by a special resolution of the Company in a general meeting, be authorized to

be borrowed. A bond under the seal of the company, signed by two directors and the secretary

was given by the Directors to the plaintiff to secure the drawings on current account without the

authority of any such resolution. Then Turquand sought to bind the Company on the basis of that

bond. Thus the question arose whether the company was liable on that bond.

The Court of Exchequer Chamber overruled all objections and held that the bond was binding on

the company as Turquand was entitled to assume that the resolution of the Company in general

meeting had been passed. The relevant portion of the judgment of Jervis C. J. reads:

"The deed allows the directors to borrow on bond such sum or sums of money as shall from time

to time, by a resolution passed at a general meeting of the company, be authorized to be

borrowed and the replication shows a resolution passed at a general meeting, authorizing the

directors to borrow on bond such sums for such periods and at such rates of interest as they

might deem expedient, in accordance with the deed of settlement and Act of Parliament; but the

resolution does not define the amount to be borrowed. That seems to me enough......We may now

take for granted that the dealings with these companies are not like dealings with other

partnerships, and the parties dealing with them are bound to read the statute and the deed of

settlement. But they are not bound to do more. And the party here on reading the deed of

settlement, would find, not a prohibition from borrowing but a permission to do so on certain

conditions. Finding that the authority might be made complete by a resolution, he would have a

right to infer the fact of a resolution authorizing that which on the face of the document appear to

be legitimately done."

Further embellishment of the rule

3 Royal Bank v Turquand (1856) 119 ER 886.

The House of Lords further endeavored to explicate the Turquand Rule in the case of Mahony v.

East Holyford Mining Co4. The case is an excellent example of Court drawing out qualifications

to the rule.

In this case the company's bank made payments based on a formal copy of a resolution of the

board authorizing payments of cheques signed by any two of three named "directors" and

countersigned by the named "secretary". The copy was itself signed by the secretary. It came out

subsequently that neither the directors nor the secretary had ever been formally appointed.

According to the articles, the directors were to be nominated by the subscribers to the

memorandum and the cheques were to be signed in such manner as the board might determine.

It was held by the House of Lords that since the bank had received formal notice in the ordinary

way of the board's decision, it was not bound to enquire further.

The Turquand's rule has also obtained statutory recognition in Section 9(1) of the European

Communities Act, 1972, which reads.

" 9. Companies.--(1) In favour of a person dealing with a company in good faith, any transaction

decided on by the directors shall be deemed to be one which it is within the capacity of the

company to enter into, and the power of the directors to bind the company shall be deemed to be

free of any limitation under the memorandum or articles of association ; and a party to a

transaction so decided on shall not be bound to enquire as to the capacity of the company to enter

into it or as to any such limitation on the powers of the directors, and shall be presumed to have

acted in good faith unless the contrary is proved."

This doctrine was further supported by the case Pacific coast coal mines Ltd v Arbuthnot5 The

rule is based upon obvious reasons of convenience in business relations. Firstly, the

memorandum and article of association are public documents, open to public inspection. But the

details of internal procedures are not thus open to public inspection. Hence an outsider “is

presumed to know the constitution of the company; but not what may or may not have taken

place within the doors that are closed to him.

4 Mahony v. East Holyford Mining Co, (1875)33 TLR 3385 Pacific coast coal mines Ltd v Arbuthnot, 1917 AC 607

Indoor management: An antithesis to Constructive Notice principle 

The company is an artificial legal person. Its objects and powers are set out in the memorandum

and articles of association as amended from time to time. The memorandum and articles, when

registered, become public documents and can be inspected by any member of the public at the

office of the RoC under Sec. 610 of the Companies Act on payment of a nominal fee.

Thus, every person who contemplates entering into a contract with a company, has the

means of ascertaining and consequently presumed to know, not only the exact powers of the

company but also to the extent to which these powers have been delegated to the directors and of

any limitation placed upon the exercise of these powers. Every person dealing with the company

is deemed to have a constructive notice of the contents of its memorandum and articles of

association. Hence, if a person enters into a contract which is beyond the powers of the company,

as defined in the memorandum, he cannot acquire any rights under the contract against the

company.

This rule proved to be too inconvenient for business transactions and hindered the smooth

flow of business. The rigours of the rule was, therefore, alleviated by the judicial pronouncement

in Royal British Bank v Turquand, and the doctrine of `indoor management' serving as a partial

exception to the doctrine of `constructive notice'.

While the doctrine of constructive notice seeks to protect the company against the

outsiders, the principal of indoor management operates to protect the outsiders while dealing

with the company. According to this doctrine, as laid down in the Royal British Bank case,

persons dealing with a company are not bound to inquire into the regularity of any internal

proceedings. In other words, while persons contract with a company they are entitled to assume

that the provisions of the Articles have been observed by the officers of the company. It is no

part of the duty of an outsider to see that the company carries out its own internal regulations. It

is sufficient if the act is not ultra vires.

The doctrine of constructive notice operates against the person who has failed to inquire.

But the doctrine of indoor management can be invoked by the person dealing with the company

and cannot be invoked by the company.

Provisions Under The Indian Companies Act, 1956

The provision under the Indian Act which directly imbibes the Turquand rule is section 290,

which reads as under:

Section 290:- Validity of acts of directors:-Acts done by a person as a director shall be valid,

notwithstanding that it may afterwards be discovered that his appointment was invalid by reason

of any defect or disqualification or had terminated by virtue of any provision contained in this

Act or in the articles:

Provided that nothing in this section shall be deemed to give validity to acts done by a director

after his appointment has been shown to the company to be invalid or to have terminated:6

Another Provision which directly follows the above stated rule is section 81 of the Indian

Companies Act, 1956 which bears the heading ‘further issue of shares’. Bona fide allottees of

shares are protected by the Doctrine of Indoor Management under s-81. Illustrating upon the

point the Punjab & Haryana High Court has avowed in the case of Diwan Singh v Minerva Mills

that”The allottees of the shares were contracting in good faith with the Company and they were

entitled to assume that the acts of the Directors in making allotments of the shares to them are

within the scope of their powers conferred upon them by the shareholders of the Company. They

were not bound to enquire whether the acts of the Directors which as in this case related to

internal management had been properly and regularly performed. Even when the Directors

exceed their powers or infringe the restrictions imposed upon them, the company may be bound

for the outsider dealing with the company is only required to see that the transactions are

consistent with the article. Strangers are justified in assuming that all matters of Indoor

management have been done regularly”.7

Exceptions To The Rule

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

6 Indian Companies Act, 1956

7 Diwan Singh v Minerva Mills

expected that its scope would be widened. But the course of decisions has made it subject to the

following exceptions. In other words, relief on the ground of ‘indoor management’ can’t be

claimed by an outsider dealing with the company in the following circumstances:

Where the outsider has knowledge of Irregularity

Suspicion of Irregularity

Forgery

Representation through Articles

Acts outside apparent authority

knowledge of Irregularity

The first and the most obvious restriction is that the rule has no application where the

party affected by an irregularity had actual notice of it. “thus where a transfer of shares

was approved by two directors, one of whom within the knowledge of the transfer was

disqualified by reason of being the transferee himself and the other was never validly

appointed, the transfer was held to be ineffective.8

Knowledge of an irregularity may arise from the fact that the person contracting was

himself a party to the inside procedure. Similarly in Howard v. Patent Ivory

Manufacturing Co,9 where the directors could not defend the issue of debentures to

themselves because they should have known that the extent to which they were lending

money to the company required the assent of the general meeting which they had not

obtained.

Likewise, in Morris v Kansseen,10 director could not defend an allotment of shares to him as he

participated in the meeting, which made the allotment. His appointment as a director also fell

through because none of the directors appointed him was validly in office.

8 Devi ditta mal v standard bank of india, (1927) 101 IC 5689 v. Patent Ivory Manufacturing Co (1888) ch D 15610 Morris v Kansseen 1946 AC 459

But after the Hely-Hutchinson v Brayhead Ltd,11 according to which the mere fact that a person

is a director does not mean that he shall be deemed to have knowledge of the irregularities

practiced by other directors. A newly appointed director does not mean that he shall be deemed

to have knowledge of the irregularities practiced by the other directors. A newly appointed

director entered into contracts of indemnity and guarantee with the company through a director

whom the company had knowingly allowed to hold himself out as having the authority to enter

into such transaction, although in fact he had no such authority. The company was held liable.

Suspicion of Irregularity:

The protection of the “Turquand Rule” is also not available where the circumstances

surrounding the contract are suspicious and therefore invite inquiry. Suspicion should

arise, for example, from the fact that an officer is purporting to act in matter, which is

apparently outside the scope of his authority. Where, for example, as in the case of Anand

Bihari Lal v. Dinshaw & co,12 the plaintiff accepted a transfer of a company’s property

from its accountant, the transfer was held void. The plaintiff could not have supposed, in

absence of a power of attorney, that the accountant had authority to effect transfer of the

company’s property.

Similarly, in the case of Haughton & co v. Nothard, Lowe & Wills Ltd.,13 where a person

holding directorship in two companies agreed to apply the money of one company in

payment of the debt to other, the court said that it was something so unusual “that the

plaintiff were put upon inquiry to ascertain whether the persons making the contract had

any authority in fact to make it.” Any other rule would “place limited companies without

any sufficient reasons for so doing, at the mercy of any servant or agent who should

purport to contract on their behalf.”

Forgery

11 Hely-Hutchinson v Brayhead Ltd (1976)3 WLR 140812 Anand Bihari Lal v. Dinshaw & co , AIR 1942 Cudh 41713 Haughton & co v. Nothard, Lowe & Wills Ltd. (1927) AII ER rep 97.

Forgery may in circumstances exclude the ‘Turquand Rule’. The only clear illustration is found

in the Ruben v Great Fingall Consolidates,14 here in this case the plaintiff was the transferee of a

share certificate issued under the seal of the defendant’s company. The company’s secretary,

who had affixed the seal of the company and forged the signature of the two directors, issued the

certificate.

The plaintiff contended that whether the signature were genuine or forged was apart 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 enquire 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 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 estoppels against the company. Hence, a general statement

that “the turnquand rule” does not apply to forgeries is not exactly warranted by the present

authorities. Thus, for example, Andrews R. Thompson writing in an extensive article on the

subject says: a company may represent that a forged instrument is genuine. In such a case, it will

be estopped from denying that a forged instrument is genuine as against an outsider who has

relied to his detriment upon the representation. Also, a company may represent that the forger

has authority to execute a forged instrument. In that event it will be bound by the forged

instrument as against an outsider who has relied on the apparent authority to execute the

instrument.

In a case before the Madras high court, a document on which a company borrowed a sum of

money was executed by the managing director who was the chief functionary of the company

14 Ruben v Great Fingall Consolidates, 1906 AC 439

and, to comply with the requirement of the articles the signatures of two other directors were

forged, the company was not allowed to eschew liability under the document.15

. Representation through Articles

The exception deals with the most controversial and highly confusing aspect of the

“Turquand Rule”. Articles of association generally contain what is called ‘power of

delegation’. Lakshmi Ratan Lal Cotton Mills v J.K. Jute Mills Co,16 explains the meaning

and effect of a “delegation clause”.

Here one G was director of the company. The company had managing agents of which

also G was a director. Articles authorised directors to borrow money and also empowered

them to delegate this power to any 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 powers to borrow to G. Yet the company was

held bound by the loans. “Even supposing that there was no actual resolution authorizing

G to enter into the transaction the plaintiff could assume that a power which could have

been delegated under the articles must have been actually conferred. The actual

delegation being a matter of internal management, the plaintiff was not bound to enter

into that.”

Power of delegation in article

Thus the effect of “delegation clause”, is that a person who contracts with an individual

director of 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.

Suppose that the plaintiff when he contracted with an individual director had not consulted with

the company’s articles and therefore, had no knowledge of existence of power of delegation.

Could he assume that the power. Of which he did not know at the time had been exercised? This

question arose in Houghton & co v Nothard , lowe and wills Ltd.17

15 Official Liquidator v Commr of police, (1969) 1 comp LJ 5 Mad.16 Lakshmi Ratan Lal Cotton Mills v J.K. Jute Mills Co AIR 1957 AII 311.17 Houghton & co v Nothard , lowe and wills Ltd (1927) AII ER Rep 97

The defendant company and one P& CO were engaged in fruit trade. One ML was director of

both the companies. By the articles of defendant company the director could delegate any of their

powers to committees consisting of such member or members of their body as they think fit”. M

L acting on the behalf of defendant company, contracted with the plaintiffs, a firm of fruit

brokers, that in consideration of the plaintiffs advancing a sum of money to P & CO, the

plaintiffs should have the right to sell on commission all the fruit imported by the defendants and

P & CO and to retain the sell proceeds belonging to both the companies as security for advance.

The plaintiffs required the confirmation of the agreement by the defendant company itself. The

secretary of the defendant company accordingly wrote a letter confirming the agreement and

then the plaintiffs made the advance. The defendants subsequently repudiated the agreement as

made without their authority. In an action for the breach of an agreement, the plaintiffs claimed

that M L and the secretary had ostensible authority as the board could have delegated their

powers to them under the company’s article.

But it was held that the plaintiffs were not entitled to assume that any authority to make the

contract had been delegated to them by the board, and this for the following reasons: firstly that “

the plaintiffs are not entitled to rely on the supposed exercise of a power which was never in fact

exercised and of existence of which they were in ignorance at the date when they contracted, and

secondly, that there was something so unusual in an agreement to apply the money of one

company in payment of debt of another that the plaintiffs were put upon an inquiry to ascertain

whether the persons making the contract had any authority in fact to make it”. Sargant LJ added

that “even the plaintiffs had know of the existence of the express power of delegation, they

would nit have been entitled to assume that it had been exercised in favour of ML or secretary to

any greater extent than was to be inferred from the position that they occupied or were held out

by the company as occupying”.

Delegated authority of acting director

it appears that the unusual nature of the transaction more than anything else was responsible for

this result. that this is so becomes clear from the subsequent decision of the same court in British

Thomson Houston Co Ltd v federataed European bank Ltd18.

18 British Thomson Houston Co Ltd v federataed European bank Ltd (1932)2 KB 176

Under company’s articles of association, the directors had the power to determine who should be

entitled to sign contracts and documents on the company’s behalf. One director NP describing

himself as the chairman and without having been so authorised, executed and gave a guarantee to

the plaintiffs in the name of the company. It was held that “if the outsider find an officer of the

company openly exercising the authority, which the directors have power to confer upon him,

they are relieved from the duty of further inquiry and are entitled to assume that the power has

been regularly and duly conferred. In the present case we have director acting in a matter which

is normally entrusted to directors. He was permitted to assume the title of the chairman of the

board of directors. The plaintiffs were entitled to assume that he was duly authorised to act for

the company”. Knowledge on the part of the plaintiffs of the contents of the articles was

considered to be irrelevant.

Ostensible position allowed to directors

Thus the ostensible position allowed to an officer is the most crucial factor. The decision of the

court of appeal in Ford Motor credit Co Ltd V Harmack19 is a further evidence of this.

One Y was in control of three companies. He acquired a car on hire- purchase in the name of one

company and gave it to the sales manager of second company for the liquidation of a debt of the

third company. The recipient though that Y owned all the three companies and they all seemed to

be one company.

Lord Denning MR said: “where there was a group of companies all controlled by the same

person who was in full control of everything- it had to be supposed that he was the chairman and

managing director of each. It seemed that he had not only actual but also ostensible authority.

The decision has been described to be “in harmony with the modern tendency to afford

protection to a third party contracting in good faith with a director having ostensible authority.

Application of the Rule by the Indian Courts

19 Ford Motor credit Co Ltd V Harmack 1972 JBL 226.

The Turquand's rule has been approved and followed by Varadaraja lyengar J., in Varkey Souriar

v. Keraleeya Banking Co. Ltd20. In the following way:

" Coming to the alternative ground, it is no doubt true that where a company is regulated by a

memorandum and articles registered in some public office, persons dealing with the company are

bound to read the registered documents and to see that the proposed dealing is not inconsistent

therewith but they are not bound to do more. They need not enquire into the regularity of the

internal proceedings what -Lord Hatherley called 'indoor management'. So if there is a managing

director and authority in the articles for the directors to delegate their powers to him, a person

dealing with him may assume that it is within the ordinary duties of a managing director. All he

has to see is that the managing director might have power to do what he purports to do. But the

rule cannot apply where the question, as here, is not one as to the scope of the power exercised

by an apparent agent of the company, but is in regard to the very existence of the agency."

In Lakshmi Ratan Cotton Mills Co. Ltd, v. J. K. Jute Mitts Co. Ltd,21 the plaintiff company sued

the defendant company on a loan for Rs. 1,50,000. Among other things the defendant company

raised the plea that the transaction was not binding as no resolution sanctioning the loan was

passed by the board of directors. The court, after referring to Turquand's case and other Indian

cases, held :“If it is found that the transaction of loan into which the creditor is entering is not

barred by the charter of the company or its articles of association, and could be entered into on

behalf of the company by the person negotiating it, then he is entitled to presume that all the

formalities required in connection therewith have been complied with. If the transaction in

question could be authorised by the passing of a resolution, such an act is a mere formality. A

bona fide creditor, in the absence of any suspicious circumstances, is entitled to presume its

existence. A transaction entered into by the borrowing company under such circumstances

cannot be defeated merely on the ground that no such resolution was in fact passed. The passing

of such a resolution is a mere matter of indoor or internal management and its absence, under

such circumstances, cannot be used to defeat the just claim of a bona fide creditor. A creditor

being an outsider or a third party and an innocent stranger is entitled to proceed on the

assumption of its existence ; and is not expected to know what happens within the doors that are

closed to him. Where the act is not ultra vires the statute or the company such a creditor would

20 Varkey Souriar v. Keraleeya Banking Co. Ltd [1957] 27 Comp Cas 591, 59421 AIR 1957 All 311

be entitled to assume the apparent or ostensible authority of the agent to be a real or genuine one.

He could assume that such a person had the power to represent the company, and if he in fact

advanced themoney on such assumption, he would be protected by the doctrine of internal

management.”