News By/Courtesy: Akanksha Dash | 21 May 2020 14:39pm IST

HIGHLIGHTS

  • It safeguards an outsider contracting with the company
  • If the contract itself is hit my fraud, this doctrine cannot save it
  • If the person contracting has no real authority to contract, the doctrine will not apply

Turquand rule or the Doctrine of Indoor management protects outsiders when the contract they have entered with the company is threatened due to the inner management of the company. However, if the transaction is a result of fraud, this doctrine will not apply. It renders the whole transaction automatically invalid. Like, in a case, a plaintiff who was given a share certificate with forged signatures was not given the benefit of this rule as the whole transaction arose out of fraud.[1] Similarly, documents having two forged signatures by the Managing Director were not accepted.[2]
However, Andrews Thompson said that if a company represents that a forged instrument or document is genuine, it will be bound by estoppel and estopped from refusing to invalidate the document against an outsider. Or, the company, if it represents that the forger had the authority to executed the forged document.[3]
Now, if an act is done by an officer of the company but it is found that the act is beyond the scope of its “apparent authority”, the company will not be made liable via the application of this doctrine. Simply because the articles did not delegate any power to the said officer doesn’t mean that the outsider is entitled to remedies under the Doctrine of Indoor Management. The doctrine will be only applicable in cases where the company had delegated such authority or implied such delegation through express or implied conduct.
A.    Kreditbank Cassel v. Schenkers Ltd.[4]
The Memorandum of the company authorized Directors to draw and accept bills of exchange; however, in this case the Branch Manager of the Manchester branch endorsed some in favor of an outsider he was personally indebted to. This was blatantly out of the authority of the Company. The court held the company not liable for this act as there was no delegation. The court also stated that, however, if fraud is committed under the ‘apparent authority’ of the company, the company will be held liable.
B.     Sri Krishna v. Mondal Bros. & Co.[5]
In a company, a manager had been vested with the apparent authority by the MoA and AoA of that company. The authority was concerning the borrowing of money. The manager borrowed money through a credit instrument but exempted from placing it in a strongbox. When the company tried to escape liability, the court said that the court had a bona fide claim for recovering money as the act was of fraud done by the officer of the company.
 
[1] Ruben v Great Fingall Consolidated 1906 AC 439.
[2] Official Liquidator v Commr of Police (1968) 38 Comp Cas 884 (Mad).
[3] Company Law Doctrines and the Authority to Contract (1955-56) 11 Toronto LJ 238, 275.
[4] (1927) 1 KB 826.
[5] AIR 1967 Cal 75.

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


Tags : indoor management, fraud, authority

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