Dehradun-Mussoorie Electric Tramway Co Ltd v Jagmandar Das

Facts

The managing agent / directors of the tramway company borrowed money on the company's behalf. Under the company's articles, borrowing required a resolution of the board, and questions arose as to whether the internal authorisation for the loan had been properly completed. The lender sought to enforce repayment against the company.

Issues

• Was the company bound by the borrowing where the lender could not verify whether the internal authorising resolution had been duly passed?
• Did the lender's constructive notice of the articles defeat the claim, or was the lender protected by the indoor management rule?

Arguments

The company contended that the borrowing was not duly authorised under its articles and so did not bind it. The lender contended that, the articles permitting such borrowing, it was entitled to assume the internal requirements had been satisfied and need not investigate the company's indoor proceedings.

Held

The Allahabad High Court applied the rule in Royal British Bank v Turquand and held the company bound. Although an outsider is fixed with constructive notice of the company's public documents (memorandum and articles), he is entitled to assume that the internal regulations have been duly complied with and is not bound to inquire into the regularity of the indoor management. The lender, having no notice of any irregularity, could recover.

Ratio decidendi

The doctrine of indoor management applies in India: a bona fide third party dealing with a company may presume due compliance with the company's internal procedures, constructive notice extending only to the public documents themselves.

Significance

A leading early Indian authority adopting the Turquand rule and harmonising it with the doctrine of constructive notice. It is the standard Indian citation establishing that the indoor management rule forms part of Indian company law.

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