Doctrine of Indoor Management in Company Law
Doctrine of Indoor Management
What is it?
The Doctrine of Indoor Management protects outsiders dealing with a company by allowing them to assume that the company’s internal rules and procedures have been properly followed.
Purpose:
To protect third parties (e.g., investors, creditors, suppliers) who deal with the company in good faith.
To avoid the burden on outsiders to verify every internal compliance or procedure of the company.
Key Points:
Also Known As: Turquand’s Rule (named after the landmark case Royal British Bank v. Turquand (1856)).
Principle:
Outsiders are entitled to assume that internal management processes of the company are regular and properly followed.
They do not have to verify internal irregularities or non-compliance with the company’s Articles or internal rules.
Applies When:
A company’s internal procedure is not followed.
A third party contracts with the company without knowledge of such irregularity.
Limits:
Does not protect outsiders if they have actual knowledge of irregularity.
Does not protect acts outside the company’s powers (ultra vires acts).
Does not apply if the third party is negligent or acting in bad faith.
Example:
If a company’s Articles require board approval before a director can bind the company to a contract, an outsider dealing with the director can assume that board approval has been obtained—even if internally it wasn’t—provided the outsider had no reason to suspect otherwise.
Why is it important?
Encourages business confidence and smooth commercial transactions.
Balances protection between company’s internal governance and outsiders’ rights.
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