Exceptions to the Doctrine of Indoor Management | Company Law - CLAT PG PDF Download

When the outsider is aware of the irregularity

• Generally, individuals are not expected to be aware of internal irregularities within a company. However, if a person is aware or has implied notice of the lack of authority and proceeds with the transaction anyway, they will not be protected by this doctrine.
• Illustration: In the case of Howard v. Patent Ivory Co. (38 Ch. D 156), the company's articles permitted the directors to borrow a maximum of one thousand pounds, with the condition that exceeding this amount required consent from the company in a general meeting.
• In this instance, the directors borrowed 3,500 pounds from one of the directors in exchange for debentures without obtaining the necessary consent. The company later refused to honor the amount. It was determined that the debentures were only valid up to one thousand pounds because the director, being involved in the company's internal operations, was fully aware of the irregularity.

Lack of Knowledge of the Articles

• The protection offered by this doctrine is not applicable to individuals who are not familiar with the articles or the memorandum of the company.
• For instance, in the case of Rama Corporation v. Proved Tin & General Investment Co., the officers of Rama Corporation were not aware of the articles of the investment company with which they were engaging in a transaction.

Negligence

• This doctrine does not extend protection to those who engage with a company in a negligent manner.
• For example, if a company officer clearly acts beyond their authority, the contracting party should exercise due diligence to verify that the officer is authorized to take such action.
• If this due diligence is not performed, the doctrine will not assist the contracting party, as seen in the case of Al Underwood v. Bank of Liverpool.

Forged Transactions and the Doctrine of Indoor Management

Transactions involving forgery or those that are illegal or void from the beginning (ab initio) indicate a lack of free will in entering into the transaction. In such cases, the doctrine of indoor management does not apply.

Ruben v. Great Fingal Consolidated

• In this case, the secretary of a company illegally forged the signatures of two directors on a share certificate to issue shares without proper authority.
• Since the directors were unaware of the forgery, they could not be held liable.
• The share certificate was deemed invalid, and the doctrine of indoor management was not applicable.

Unauthorized Use of Company Seal

• The wrongful and unauthorized use of a company's seal also falls under the exception where the doctrine of indoor management cannot be applied.

Third-Party Involvement

• The doctrine of indoor management does not apply in situations involving a third party's agency.
• For instance, in the case of Varkey Souriar v. Keraleeya Banking Co. Ltd., the doctrine was not applicable when an agent of the company exercised any power.

Oppression Cases

• The doctrine of indoor management cannot be implied in cases of oppression, where the actions of individuals within the company are called into question.