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
cant 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
3
4
5
6
7

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

(1875) LR 7 HL 869
Section 3(1) of the Limited Liability Partnership Act 2008
Section 36 of the Limited Liability Partnership Act 2008

[1928] 1 KB 48 (Sealy p 221)

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

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

10

AIR 1957 All 311

11

[1968]38 Comp. cas 884 (Mad)