News By/Courtesy: Akanksha Dash | 21 May 2020 14:32pm IST

HIGHLIGHTS

  • The doctrine is to safeguard the interest of the outsider
  • The outsider might not have knowledge of the inner management of the company
  • But if he had notice of the irregularity, he will not be safeguarded against it

The Doctrine of Indoor Management is to protect the outsider who contracts with the Company from any irregularities or defaults which occur due to the inner workings of the company. The idea behind this is that an outsider cannot be thorough with the inner workings of a company and hence should not be made to pay any issue that occurs within the company’s management. An obvious exception to the rule of Indoor Management would be where the outsider had actual notice of the presence of the irregularity. It could also be the case that the third party or the outsider is a party to the said transaction too. We’ll discuss this exception through some case laws:
  • Devi Ditta Mal v. Standard Bank of India[1]
The third-party alleged their names should not be listed in the list of contributors during the winding up of the company as they had already transferred their shares to B, who was the Managing Director and Manager of the Bank. However, it was found out that the mandatory sanction required by the Company was invalid in this case due to the requisite number of directors not being present.
The third-party wasn’t allowed to take the benefit of the mistake committed with the management of the company since the requirements related to the transfer of shares were laid out in the Articles of Associations and the third party had knowledge of it.
  • Howard v. Patent Ivory Mfg Co.[2]
The Directors of the Company had issued debentures for themselves. However, this transaction was invalidated because the said lending, due to the amount of it, required a sanction or approval in the general meeting which had not been obtained.
In this case too, the directors were not allowed to take the defense of indoor management because being the directors, they should have known of the want for sanction.
  • T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon & Co. Ltd.[3] 
Money was lent by Company A to B in place of mortgaging the assets of Company B. The procedures along with specific requirements were mentioned in the Articles. It was seen that those were not complied with. Also, the Director of Company A and B were the same. The Court held that since the outsider must have had notice of this irregularity by being the Director in Company B, the doctrine of Indoor Management did not apply and the transaction wasn’t valid.
However, in the case of Hely-Hutchinson v Brayhead Ltd,[4] the court departed from this general rule i.e. the assumption that the director must be knowing irregularity. In the above-mentioned case, since, he was a newly appointed director, he was excused for not knowing about the existence of the irregularity. 
[1] AIR 1927 Lah 797.
[2] (1888) 38 Ch D 156.
[3] (1936) 6 Comp. Cas. 90.
[4] 1968 1 QB 549.

Section Editor: Pushpit Singh | 21 May 2020 18:40pm IST


Tags : turquand, indoor management

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