by The Doctrine of Indoor Management is a legal principle that protects outsiders dealing with a company. It says that people dealing with a company in good faith are entitled to assume that the internal procedures and rules of the company have been properly followed, even if in reality they have not.
Origin
This doctrine was first established in the English case:
- Royal British Bank v. Turquand (1856)
In this case, the court held that an outsider (the bank) could assume that the company had followed its internal rules in borrowing money, even though internal approvals were missing.
⚖ Legal Position in India
Indian courts have accepted this doctrine and applied it consistently. It is a counterbalance to the Doctrine of Constructive Notice, which binds outsiders to the public documents of the company (e.g., Memorandum and Articles of Association).
Key Features
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Protects outsiders who act in good faith.
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Assumes that internal procedures (e.g., board resolutions, approvals) have been complied with.
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Ensures business convenience and trust in corporate dealings.
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Especially important when companies do not disclose their internal governance openly.
Examples
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If the Articles of Association say that borrowing must be approved by a resolution, and an officer borrows money, the lender can assume the resolution has been passed—even if it wasn’t—unless they had reason to doubt it.
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A contract signed by a managing director is valid unless the outsider knows that the MD didn’t have the authority.
Exceptions to the Doctrine of Indoor Management
The protection offered by the doctrine is not absolute. There are important exceptions where the outsider cannot claim protection:
1. Knowledge of Irregularity
If the outsider knew about the internal irregularity, they cannot claim protection.
🧾 Example: A supplier knows that a manager is acting without board approval but still proceeds with the deal.
2. Suspicion of Irregularity
If the circumstances are suspicious and would make a reasonable person inquire further, failure to do so loses the protection.
🧾 Example: A company secretary signs a large contract alone, without any board member. This may raise suspicion.
3. Forgery
The doctrine does not apply to forgery. A forged document is void, and no one can rely on it, even in good faith.
🧾 Example: A forged share certificate issued by an employee is not binding on the company.
4. Acts Outside Apparent Authority
If the act done is clearly beyond the powers of the officer (ultra vires), the company is not bound.
🧾 Example: A clerk signing a loan agreement beyond their role.
5. Negligence by Outsider
If the outsider fails to verify facts when it is easy to do so, courts may not offer protection.
🧾 Example: Not checking the authority of a director for a high-value transaction.
