Applicability of Doctrine of Indoor Management to LLP

Meaning of Indoor Management

The word “in-door” suggest the thing which is going on other side of the door i.e. an outsider

can’t see and observe the company internal affairs. The doctrine of Indoor management,

popularly known as the Turquand's rule initially arose some 150 years ago in the context of the

doctrine of constructive notice. The doctrine of indoor management is an exception to the rule of

constructive notice. It imposes an important limitation on the doctrine of constructive notice.

According to doctrine of Indoor management “persons dealing with the company are entitled

to presume that internal requirements prescribed in memorandum and articles have been

properly observed”.

Doctrine of Constructive Notice

Memorandum of Association and Articles of Association are two most important documents

needed for the incorporation of a company. The memorandum of a company is the

constitution/charter of a company. On the other hand, the articles of association enumerate

claim the internal rules of the company under which it will be governed. Section 610 of the

Companies Act, 1956 provides that the memorandum and articles when registered with

Registrar of Companies 'become public documents' and then they can be inspected by

anyone on payment of a nominal fee.

Therefore, notice about the contents of memorandum and articles is said to be within the

knowledge of both members and non- directors members of the company. Such notice is a

deemed notice in case of members and a constructive notice in case of non-members.

Thus, every person dealing with the company is deemed to have a constructive notice of the

contents of the memorandum and articles of the company. An outsider dealing with the

company is presumed to have read the contents of the registered documents of the company.

The further presumption is that he has not only read and inspected the documents but has also

understood them fully in the proper sense. This is known as the rule of constructive notice.

So, the doctrine or rule of constructive notice is a presumption operating in favour of the

company against the outsider. It prevents the outsider from claiming that he did not know that

the constitution of the company rendered a particular act or a particular delegation of authority

ultra vires.

Origin of the Doctrine of Indoor Management

The doctrine of indoor management was first laid down in the famous case of Royal

British Bank v. Turquand. In this case, the directors of a company had issued a bond to

Turquand.1 They had the power under the articles to issue such bond provided they were

authorized by a resolution passed by the shareholders at a general meeting of the company. But

no such resolution was passed by the company. It was held that Turquand could recover the

1 (1856) 119 ER 886.

amount of the bond from the company on the ground that he was entitled to assume that the

resolution was passed.

The memorandum and articles of association are public documents, open to public inspection.

But the details of internal procedure are not thus open to public inspection. Hence, an outsider “is

presumed to know the constitution of a company; but not what may or may not have taken place

within the doors that are closed to him.” 2

Establishment of the Doctrine

The rule was not accepted as being firmly well established in law until it was approved by the

House of Lords in Mahoney v East Holyford Mining Co3. In this case, the company's articles

provided that cheques should be signed by any two of the three named directors and by the

secretary, the fact that the directors who had signed the cheques had never been properly

appointed was held to be a matter of internal management, and the third parties who received

those cheques were entitled to presume that the directors had been properly appointed, and cash

the cheques.

Applicability to LLP

A Limited Liability Partnership is a body corporate having a separate legal entity4. The

memorandum and articles of association are the charter of the company, likewise LLP agreement

is the charter of LLP. LLP agreement provides for activities of the LLP and the internal rules

which will govern functioning of LLP. Company is an artificial person having separate legal

entity, LLP is also an artificial person having separate legal entity. All the documents filed by

Company with Registrar of companies are in public view and anyone can view the documents of

company, likewise the documents of LLP are also available to public for scrutiny so as to protect

the interest of partners, creditors, third parties and outsiders dealing with LLP5. The rule should

protect the interest of the third party who transacts with the LLP in good faith and to whom the

LLP is indebted. Implication of Doctrine of Indoor management in LLP lays down that persons

dealing with LLP having satisfied themselves that the proposed transaction is not in its nature

inconsistent with the LLP agreement and are not bound to inquire into the regularity of any

internal proceeding. Hence, Doctrine of indoor management should be made applicable to LLP.

Case Note:

� B Liggett (Liverpool) Ltd v Barclays Bank Ltd6

� Hely-Hutchinson v Brayhead Ltd7

� Rolled Steel Products (Holdings) Ltd v British Steel Corpn8

2 Pacific Coast Coal Mines Ltd v Arbuthnot, 1917 AC 607.

3 (1875) LR 7 HL 869

4 Section 3(1) of the Limited Liability Partnership Act 2008

5 Section 36 of the Limited Liability Partnership Act 2008

6 [1928] 1 KB 48 (Sealy p 221)

7 [1968] 1 QB 549 (Sealy p 224)

8 [1986] Ch 246 (Sealy pp 163 and 222)

� Varkey Souriar v. Keraleeya Banking Co. Ltd 9

� Lakshmi Ratan Cotton Mills Co. Ltd, v. J. K. Jute Mitts Co. Ltd10

� Official Liquidator, Manasube & Co. (P.) Ltd. V. Commissioner of police11

� Monark Enterprises v Kishan Tulpule and Ors

9 1957] 27 Comp Cas 591, 594 ; AIR 1957 Ker 97

10 AIR 1957 All 311

11 [1968]38 Comp. cas 884 (Mad)