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Doctrine of Indoor Management and Its Exceptions

The Doctrine of Indoor Management, also known as the Turquand Rule, plays a pivotal role in corporate law by protecting external parties in their dealings with companies. This doctrine is an exception to the Doctrine of Constructive Notice, focusing on the rights and protections of third parties rather than the obligations of those dealing with the company.

Doctrine of Indoor Management

  • Originating from the landmark case of Royal British Bank v. Turquand, this doctrine establishes that external parties engaging with a company can assume that the company's internal processes and requirements (as laid out in its MOA or AOA) have been properly followed.
  • The essence of the doctrine is that while outsiders are expected to be aware of the public documents of a company, such as the MOA and AOA, they are not required to understand the internal workings or ensure that internal procedures have been complied with.
  • In the case of Royal British Bank v. Turquand, it was held that Turquand was entitled to assume that the directors had the authority to issue a bond, as he was not obligated to confirm whether the necessary company resolution authorizing the borrowing had been passed.

Exceptions to the Doctrine

While the Doctrine of Indoor Management provides significant protection to third parties, there are notable exceptions where the doctrine does not apply:

  1. Knowledge of Irregularity: If the external party had actual knowledge of the internal irregularity within the company, they cannot claim the protection of this doctrine.
  2. Suspicion of Irregularity: If circumstances are such that a reasonable person would be suspicious of the irregularity, the doctrine may not protect the outsider.
  3. Forgery: The doctrine does not apply if the transaction involves a forgery or fraudulent representation by company officials.
  4. No Representation: If no attempt was made to portray that internal procedures were followed, the outsider cannot claim the protection of the doctrine.
  5. Acting in Bad Faith: Parties acting in bad faith or colluding with insiders to circumvent internal procedures cannot avail themselves of the protections afforded by the doctrine.
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