Indoor Management With Limitation And Exceptions

Common Law Indoor Management Rule

Discuss about the Indoor Management with Limitation and Exceptions.

The indoor management rule is a doctrine under the company law which is globally accepted.  The usual course of practice a company adopts to enter into contracts and other transactions is through agents who are authorized to act for the company.  Thus, the said doctrine of indoor management states how laws are established to protect the an outsider who acts in a bona fide manner while contracting with the company’s agent against claims initiated by the company at a later stage that the company fails to be bound by the contract as the said agent lacked appropriate authority (Davies 2010).

The common law indoor management rule relies on the presumption that it is nearly impossible for an outsider involved with company for transactions is to be aware of its internal management and working. According to the rule of indoor management any individual who deals or contracts with a company is not required to inquire whether the company’s internal management in relation to the contract is properly followed as long as they are satisfied that the said contract or transaction has taken place according to the article and memorandum of association of the company. Thus, the said rule states that individuals contracting with a company are presumed to be aware about the content in the memorandum and articles of association of a company and can assume that the officer or agent dealing with them on behalf of the company has complied with the memorandum and articles of association of the company (Winch 2010).

The said rule was established with the famous English case law Royal British Bank v Turquand (1856) 6 E&B 327. In the said case, Mr. Turquand was the liquidator of a company which was insolvent. The said company gave bonds to the Royal British Bank on security of current drawings of the company. The said bond was signed by 2 directors and the company’s secretary. On being sued the company argued that an articles of the said company states that the directors are allowed to borrow money only after company passing a resolution and the resolution does not specific the amount to be borrowed. The Court in the said case stated that the bond was duly executed as the bank was not entitled to know or inquire into company’s internal management (Sealy and Worthington 2013). The Court said that bank had to be aware of the articles which were registered at the Companies House which is open for the public to review that the directors of the company have the authority to borrow money by a resolution. But bank was not required to know what was passed in the said resolution. This judgment created the rule of indoor management.

Application in Australia

In Australia, all the laws and regulations in relation to company and business law are stated in the Corporation Act 2001. The laws in the said Act are to be complied with every company operative in Australia. The law in relation to doctrine of indoor management is also incorporated in the sections of the Corporation Act 2001 (Delport 2011). Section 128 and section 129 of the Corporation Act 2001 discuss the rule on indoor management as applicable in Australia. Section 128 of the Corporation Act gives any person dealing with a company the right to make certain assumptions under section 129 of the Corporation Act 2001. Thus, the section 128(1) of the Corporation Act 2001 states that every person “dealing” with a company can make certain assumptions. In the case, Gye v McIntyre, the Court stated that the word “dealing” should be given wide interpretation to include not just contracts but also single transactions, pre-negotiations for contracts and purported dealings. Thus, the assumptions in the said case can extend to past transactions and dealing of a company, its dealings with a third party, situations where third parties mentions an irregular past dealing of the company with an outside. In fact, the scope of the said section extends to allow assumptions even if the agent of the company or its officers acts fraudulently (Dignam and Hicks 2011). However, the section does not allow assumption in cases where the individual assuming is aware or suspects the assumption to be wrong or incorrect. Thus section 128(4) of the Corporation Act provides a defense which the company can use against claims arose based on section 128 and 129 of the Corporation Act 2001 is that the individual was aware of the irregular internal management of the company and thus cannot rely on the assumption that the internal management was followed properly. Therefore, in USSC v Hospital Products International Pty Ltd, the Court stated that any dishonest failure on part of the person dealing with a company to inquire about irregularity in the management with the fear to discover fraud or breach is considered as having knowledge of the said fraud or breach. Thus, the doctrine of indoor management cannot be applied in such cases (Goulding 2013).

Section 129 of the Corporation Act is the statutory adoption of the common law doctrine of indoor management. Section 129 of the Corporation Act 2001 states the list of assumptions an outsider dealing with a company is allowed to make. According to the said section, the first assumption a person dealing with a company can make is to assume the said company has followed all the provisions of its constitution and its replaceable rules which define a company’s internal management (Goulding 2013).

Section 128 of the Corporation Act 2001

Although section 129(1) of the Corporation Act adopts the doctrine of indoor management, its scope is narrower compared to the common law doctrine of indoor management. The scope of section 129(1) of the Corporation Act 2001 is limited to assumption about the company’s constitution and the replacement rules however, the common law doctrine of indoor management will go beyond to include assumptions about compliance which the company is required to comply with under the Corporation Act 2001 which talk about the company’s internal management and not just the replaceable rules (Du Plessis et al 2010).

Section 129(2) of the Corporation Act 2001 states that a person dealing with a company can assume that the director or the company secretary as mentioned in the information from ASIC are appointed under appropriate authority and have powers they are exercising in relation to the dealing. This section states something in addition to the common law doctrine of indoor management (Garnett2012). It is not the exact copy of the common law doctrine of indoor management because it states that the outsider dealing with company is not required to read the ASIC information to rely on assumption. Thus, the common law doctrine requires an individual who is an outsider in the company to have seen the records to rely on the assumption which is not the case in section 129(2) of the Corporation Act 2001.

Section 129(3) of the Corporation Act 2001 states that any individual who is held out y the company to be an agent or an officer is duly appointed and has the authority to exercise the powers he’s exercising. The issue in interpreting this section is to determine who has the authority to make the “holding out” (Shepherd and Ridley 2015). Thus, the said section is an attempt to make the common law doctrine of indoor management statutory in nature. In Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd, the Court confirms that according to common law doctrine of indoor management “holding out” is permitted by individuals in the company with actual authority, however under section 129(3), the need of actual authority as opposed to ostensible authority is not states. Thus, the Corporation Act 2001 gives section 129(3) a wider scope compared to common law doctrine of indoor management (Singh 2015).

Section 129(4) of the Corporation Act 2001 states that person dealing with a company can assume that the company’s agent and officer duly performed their duties. Additionally, section 129(5) of the Corporation Act 2001 states that a person dealing with a company can assume that any document signed without the company’s seal is duly signed if it’s signed by either 2 directors of the total 3 directors in a company, any one director along with the company secretary or single directors where there is no other director. Section 129(6) of the Corporation Act states that a person dealing with a company can assume that any document is duly signed if contains company’s common seal or is witnessed by people when the common seal was attached to it. There are multiple interpretation to section 129(4) of the Corporation Act 2001, thus, the one that compiles with the common law doctrine of indoor management is usually adopted. Additionally, the section 129(5) and 129(6) of the Corporation Act 2001 also is incorporated in the Australian business law to promote the common law doctrine of indoor management (Abeysekera 2013).

Section 129 of the Corporation Act 2001

Section 129(7) of the Corporation Act 2001 states that a person dealing with a company can assume that officer and agent who are authorize to issue documents for the company have the appropriate power to guarantee that the company papers and document are true copy. Under the common law doctrine of indoor management there is ambiguity about whether a company officer or secretary is authority to guarantee the documents of a company as genuine, however, the said ambiguity is solved under section 129(7) of the Corporation Act 2001 (Bachoo et al 2013). Thus, the provisions of 128 and 129 of the Corporation Act 2001 are formed with great efficient and the primary purpose of enacting the said sections in Corporation Act 2001 in Australia was to repair the faults and ambiguities present in the common law doctrine of indoor management. However, the said sections are complex in nature and somewhere fail to protect an outsider in reality failing to satisfy the intention of the Parliament while drafting the said sections. Thus, further statutory and legislative changes are required to make the section 128 and section 129 of the Corporation Act 2001 competent to promote the intention of the Australia Parliament to protect outsiders against the internal procedures and management of a company.

Thus, the Courts in Australia like in Mahony v East Holyford Mining Co (1874-75), LR 7 HL 869 always rely on the doctrine of indoor management. In the said case, the articles of a company stated that cheques have to be signed by 2 or more directors or by a director along with the secretary, and the fact that the director who signed the cheques was not duly appointed was considered a matter of internal management and thus, the outsider who received the cheque was not required to assume whether the director was duly appointed. Thus, in Australia, in most cases, the doctrine of indoor management is relied on; however, the said rule has certain exceptions. The primary exception is knowledge of irregularity which is also stated under section 128 of the Corporation Act. This exception states that when the individual has knowledge of certain internal irregularity, he is not allowed to rely on assumptions mentioned in section 129 of the Corporation Act. For example, if share transfer certificate has to be signed by 2 directors and the transferor was aware that one of the 2 directors who signed the said certificate was removed or disqualifies to be a director, the rule of indoor management shall not apply. (Ferran and Ho 2014). Thus, any apparent irregularity is required to be inquired about and the said protection is not allowed to be relied on in such cases. The other exceptions to the rule of indoor management are suspicion, forgery, and representation through Articles. The indoor management rule is not applicable in cases where an outsider signing the contract is under suspicion of certain irregularity; in this case, he is required to inquiry into the matter and is not allowed to rely on the said doctrine if he failed to inquire. Documents which are forged do not come under the preview of doctrine of indoor management. Additionally, if the Articles of Association of a Company clearly states something or something with an actual direct interpretation, the outsider contracting with the company is suppose to be aware of the same. Thus, internal management procedures stated in the Articles of Association of a company do not come under the scope of indoor management rule. Additionally, the benefits of the said rule cannot be taken if the irregularity was discoverable with proper inquiry.

Comparison between Common Law and Section 129

Thus, both the common law doctrine of indoor management and the indoor management rule under the section 128 and 129 of the Corporation Act 2001 have adopted business approach in order to protect an individual who is an outsider when he makes transactions with a company. The principle behind indoor management of business convenience is to put the desired result of the business transaction above the financial interest of innocent officers and agents of a said company. Thus, the common law doctrine of indoor management and the indoor management in the section 128 and 129 of the Corporation Act 2001 differ in how balance is to be shifted to protect the outsider. In some aspects, the scope is wider in common law doctrine of indoor management and in some cases, the ambiguity in common law doctrine of indoor management is solved by its statutory interpretation mentioned in sections 128 and 129 of the Corporation Act 2001 (Nielson and Harris 2010). However, the routine practice of application of indoor management gives various powers to the directors of the company, which are often mis-used, therefore, the common law doctrine of indoor management is required to be made statutory with its limitation and interpretation to make it clear and minimum the misuse of the said doctrine by the directors of the company.

Reference List

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