Wednesday, October 15, 2008

THE INDOOR MANAGEMENT RULE



The Memorandum of Association of a Company has to be lodged with the Registrar of Companies . Because this is available for public inspection, people doing business with the Company are free to inspect the document to see if there is any limitation of powers or limitations placed on the nature of the business. This created a problem- outsiders are deemed to know any limitation place on the Directors of the Company. Therefore if later, it was found that there was some irregularity within the Company in respect of any decisions, outsiders having dealing with the Company are deemed to be aware of it. This became known as the doctrine of constructive notice.

However this created problem for outsiders who who had no knowledge if some internal procedure had not been complied with.

THE INDOOR MANAGEMENT RULE

To circumvent the above problem the Courts developed the Indoor Management Rule. This principle was first formulated in the case of Royal British Bank v Turquand ALL ER 435 [1856]. This case law principle protects innocent parties who are doing business with the Company and are not in a position to know if some internal rule has not been complied with.

In the above case, the Directors of a Company issued a bond to the Royal British Bank.The AA of the Company stated that they had the power to do so,if authorised by the general resolution of the Company.

The Company claimed that there was no resolution passed authorising the issue of the bond and that therefore the Company was not liable.

The Court held that the Company was entitled to sue on the bond. As the requirement for the resolution was a matter of internal regulation for the Company and the Bank could not know whether such resolution had in fact been passed, it was entitled to presume that the resolution had indeed been passed.

The rule is also known as the Indoor Management rule.

The rule in Turquand's case is a presumption of regularity. In other words, a person dealing with the Company is entitled to presume that all the internal procedures of the Company have been complied with. This is a practical approach to solving problems facing outsiders because an outsider would have difficulty to discover what is going on in the Company.

To summarize the above points

1. If an officer of the Companyhas exceeded his authority as given to him by the AA

2. there has been some non compliance with an internal procedure

3. the outsider may presume that the internal procedure had been complied with.

6 comments:

Sumayya said...

thanks

yasoda said...

it was really helpful.....

sastry kv kunapuli said...

nice write up.
however for a completed understanding of the doctrine, it is felt essential to make a mention of the exceptions also....

Kelly Kua said...

who is AA?

Anonymous said...

Actual authority?

Anonymous said...

Articles of Association!!