Page 165 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Corporate Legal Framework

Notes officers of the company. In other words, they are not bound to enquire into the regularity of

internal proceedings. An outsider is not expected to see that the company carries out its internal
regulations.

Example: The directors of a company were authorised by the articles to borrow on bond
such sums of money as should from time to time, by a resolution of the company in general
meeting, be authorised to be borrowed. The directors gave a bond to T without the authority of
any such resolution. The question arose whether the company was liable on the bond. Held: The
company was liable on the bond, as T was entitled to assume that the resolution of the company
in general meeting had been passed [The Royal British Bank v. Turquand (1856) 6 E & B 327].

Exceptions. The doctrine of indoor management is subject to the following exceptions:
1. Knowledge of irregularity. The rule does not protect any person who has actual or
constructive notice of the want of authority of the person acting on behalf of the
company.

Example: The articles of a company empowered the directors to borrow up to £ 1,000. They
could exceed the limit of £ 1,000 with the consent of the company in general meeting. Without
such consent, they borrowed £3,500 from themselves and took debentures. The company refused
to pay the amount. Held: Their debentures were good to the extent of £ 1,000 only as they had
notice of the internal irregularity [Howard v. Patent Ivory Co., (38 Ch. D. 156)].
2. No knowledge of articles. The rule cannot be invoked in favour of a person who did not
consult the memorandum and articles and thus did not rely on them.

Example: T was a director in the investment company. He, purporting to act on behalf of
the company, entered into a contract with the Rama Corporation and took a cheque from the latter.
The articles of the company did provide that the Directors could delegate their powers to one of
them. But Rama Corporation never read the articles. Later, it was found that the directors of the
company did not delegate their powers to T. Plaintiffs relied on the rule of Indoor Management.
Held: They could not, because they did not know the existence of the power to delegate. [Rama
Corporation v. Proved Tin and General Investment Co. (1952) 1 All ER 554].
3. Void or illegal transaction. The rule does not apply to transactions which are void or illegal
ab initio, e.g., forgery.

Example: The secretary of a company forged signature of two of the directors required

under the articles on a share certificate and issued the certificate without authority. The applicants

claimed to be entitled to be registered as members of the company. Held: The certificate was a
nullity and the holder of the share certificate could not take advantage of the doctrine of indoor

management [Ruben v. Great Fingal Consolidated (1906) A.C 439].
4. Negligence. If an officer of a company does something which would not ordinarily be

within his powers, the person dealing with him must make proper enquiries and satisfy

himself as to the officer’s authority. If he fails to make inquiry, he cannot rely on the rule.
Example: A person who was sole director and principal shareholder of a company paid into
his own account cheques drawn in favour of the company. The bank should have made enquiries
as to the power of the director. The bank was put upon inquiry and was accordingly not entitled
to rely upon the ostensible authority of director [A. L. Underwood v. Bank of Liverpool (1924) 1 K.
B. 775].

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