Q.1. The Articles of Association of XYZ Ltd.

provides that Board of Directors has authority to issue

bonds provided such issue is authorized by the shareholders by a necessary resolution in the
general meeting of the company. The company was in dire need of funds and therefore, it issued
the bonds to Mr. X without passing any such resolution in general meeting. Can Mr. X recover
the money from the company? Decide referring the relevant provisions of the Companies Act,
2013.

Ans. According to the Doctrine of Indoor Management, if an act is authorised by the articles or
memorandum, an outsider is entitled to assume that all the detailed formalities for doing that act
have been observed. As per the case of the Royal British Bank vs. Turquand [1856] 6E & B 327,
the directors of R.B.B. Ltd. gave a bond to T. The articles empowered the directors to issue such
bonds under the authority of a proper resolution. In fact, no such resolution was passed.
Notwithstanding that, it was held that T could sue on the bonds on the ground that he was
entitled to assume that the resolution had been duly passed. This is the doctrine of indoor
management, popularly known as Turquand Rule.

Since, the given question is based on the above facts, accordingly here in this case Mr. X can
recover the money from the company considering that all required formalities for the passing of
the resolution have been duly complied.

Q.2. When a company is registered, it is clothed with a legal personality. Explain.

Ans. When a company is registered, it is clothed with a legal personality. It comes to have almost the
same rights and powers as a human being. Its existence is distinct and separate from that of its
members. A company can own property, have bank account, raise loans, incur liabilities and
enter into contracts.

(a) It is at law, a person different altogether from the subscribers to the memorandum of
association. Its personality is distinct and separate from the personality of those who
compose it.
(b) Even members can contract with company, acquire right against it or incur liability to it. For
the debts of the company, only its creditors can sue it and not its members.

A company is capable of owning, enjoying and disposing of property in its own name. Although
the capital and assets are contributed by the shareholders, the company becomes the owner of its
capital and assets. The shareholders are not the private or joint owners of the company’s
property.
Q.3. Flora Fauna Limited was registered as a public company. There are 230 members in the company
as noted below:

(a) Director their relatives 190

(b) Employee 15
(c) Ex-Employee (Shares were allotted when they were employee) 10
(d) 5 couples holding shares jointly in the name of husband and wife (5*2) 10
(e) Other 5

The Board of Directors of the company propose to convert it into a private company. Also advise
whether reduction in the number of members is necessary.

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Ans. According to section 2(68) of the Companies Act, 2013, "Private company" means acompany
having a minimum paid-up share capital as may be prescribed, and which by its articles, except
in case of One Person Company, limits the number of its members to two hundred.

However, where two or more persons hold one or more shares in a company jointly, they shall,
for the purposes of this clause, be treated as a single member.

It is further provided that –

(A) persons who are in the employment of the company; and

(B) persons who, having been formerly in the employment of the company, were members of
the company while in that employment and have continued to be members after the
employment ceased,

shall not be included in the number of members.

In the instant case, Flora Fauna Limited may be converted into a private company only if the total
members of the company are limited to 200.
Total Number of members

(a) Director their relatives 190

(b) 5 couples (5*1) 5
(c) Others 5
Total 200

Therefore, there is no need for reduction in the number of members since existing number of
members are 200 which does not exceed maximum limit of 200.
Q.4.
(i) F, an assessee, was a wealthy man earning huge income by way of dividend and interest.
He formed three Private Companies and agreed with each to hold a bloc of investment as
an agent for them. The dividend and interest income received by the companies was
handed back to F as a pretended loan. This way, F divided his income into three parts in a
bid to reduce his tax liability.

Decide, for what purpose the three companies were established? Whether the legal
personality of all the three companies may be disregarded.

(ii) Can a non-profit organization be registered as a company under the Companies Act, 2013?
If so, what procedure does it have to adopt?

Ans.
(i) The House of Lords in Salomon Vs Salomon & Co. Ltd. laid down that a company is a
person distinct and separate from its members, and therefore, has an independent separate
legal existence from its members who have constituted the company. But under certain
circumstances the separate entity of the company may be ignored by the courts. When that
happens, the courts ignore the corporate entity of the company and look behind the
corporate façade and hold the persons in control of the management of its affairs liable for
the acts of the company. Where a company is incorporated and formed by certain persons
only for the purpose of evading taxes, the courts have discretion to disregard the corporate
entity and tax the income in the hands of the appropriate assessee.

1. The problem asked in the question is based upon the aforesaid facts. The three
companies were formed by the assessee purely and simply as a means of avoiding tax
and the companies were nothing more than the façade of the assessee himself.
Therefore the whole idea of Mr. F was simply to split his income into three parts with
a view to evade tax. No other business was done by the company.

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2. The legal personality of the three private companies may be disregarded because the
companies were formed only to avoid tax liability. It carried on no other business, but
was created simply as a legal entity to ostensibly receive the dividend and interest and
to hand them over to the assessee as pretended loans. The same was upheld in Re Sir
DinshawManeckji Petit AIR 1927 Bom.371 and Juggilal vs. Commissioner of Income
Tax AIR (1969) SC (932).

(ii) Yes, a non-profit organization be registered as a company under the Companies Act, 2013
by following the provisions of section 8 of the Companies Act, 2013. Section 8 of the
Companies Act, 2013 deals with the formation of companies which are formed to

 promote the charitable objects of commerce, art, science, sports, education, research,
social welfare, religion, charity, protection of environment etc.

Such company intends to apply its profit in

 promoting its objects and

 prohibiting the payment of any dividend to its members.

The Central Government has the power to issue license for registering a section 8
company.

(i) Section 8 allows the Central Government to register such person or association of
persons as a company with limited liability without the addition of words ‘Limited’
or ‘Private limited’ to its name, by issuing licence on such conditions as it deems fit.
(ii) The registrar shall on application register such person or association of persons as a
company under this section.
(iii) On registration the company shall enjoy same privileges and obligations as of a
limited company.

Q.5. Naveen incorporated a “One Person Company” making his sister Navita as the nominee. Navita
is leaving India permanently due to her marriage abroad. Due to this fact, she is withdrawing her
consent of nomination in the said One Person Company. Taking into considerations the
provisions of the Companies Act, 2013 answer the questions given below.

(a) If Navita is leaving India permanently, is it mandatory for her to withdraw her nomination
in the said One Person Company?
(b) If Navita maintained the status of Resident of India after her marriage, then can she continue
her nomination in the said One Person Company?

Ans.
(a) Yes, it is mandatory for Navita to withdraw her nomination in the said OPC as she is leaving
India permanently as only a natural person who is an Indian citizen and resident in India
shall be a nominee in OPC.
(b) Yes, Navita can continue her nomination in the said OPC, if she maintained the status of
Resident of India after her marriage by staying in India for a period of not less than 182 days
during the immediately preceding financial year.

Q.6. Examine the following whether they are correct or incorrect along with reasons:

(a) A company being an artificial person cannot own property and cannot sue or be sued.
(b) A private limited company must have a minimum of two members, while a public limited
company must have at least seven members.

Ans.
(a) A company being an artificial person cannot own property and cannot sue or be sued

Incorrect: A company is an artificial person as it is created by a process other than natural

birth. It is legal or judicial as it is created by law. It is a person since it is clothed with all the
rights of an individual.

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Further, the company being a separate legal entity can own property, have banking account,
raise loans, incur liabilities and enter into contracts. Even members can contract with
company, acquire right against it or incur liability to it. It can sue and be sued in its own
name. It can do everything which any natural person can do except be sent to jail, take an
oath, marry or practice a learned profession. Hence, it is a legal person in its own sense.

(b) A private limited company must have a minimum of two members, while a public limited
company must have at least seven members.

Correct: Section 3 of the Companies Act, 2013 deals with the basic requirement with respect
to the constitution of the company. In the case of a public company, any 7 or more persons
can form a company for any lawful purpose by subscribing their names to memorandum and
complying with the requirements of this Act in respect of registration. In exactly the same
way, 2 or more persons can form a private company.

Q.7. JABC Limited has allotted equity shares with voting rights to XYZ Limited worth ` 15 Crores and
issued Non-Convertible Debentures worth ` 40 Crores during the Financial Year 2019-20. After
that total Paid-up Equity Share Capital of the company is ` 100 Crores and Non-Convertible
Debentures stands at ` 120 Crores.

Define the Meaning of Associate Company and comment on whether ABC Limited and XYZ
Limited would be called Associate Company as per the provisions of the Companies Act, 2013?

Ans. As per Section 2(6) of the Companies Act, 2013, an Associate Company in relation to another
company, means a company in which that other company has a significant influence, but which
is not a subsidiary company of the company having such influence and includes a joint venture
company.

The term “significant influence” means control of at least 20% of total share capital, or control of
business decisions under an agreement.

The term “Total Share Capital”, means the aggregate of the –

(a) Paid-up equity share capital; and

(b) Convertible preference share capital.

In the given case, as ABC Ltd. has allotted equity shares with voting rights to XYZ Limited of `
15 cr, which is less than requisite control of 20% of total share capital (i.e 100 cr) to have a
significant influence of XYZ Ltd. Since the said requirement is not complied, therefore ABC Ltd.
and XYZ Ltd. are not associate companies as per the Companies Act, 2013. Holding/allotment of
non-convertible debentures has no relevance for ascertaining significant influence.

Q.8. SK Infrastructure Limited has a paid up share capital divided into 6,00,000 equity shares of ` 100
each. 2,00,000 equity shares of the company are held by Central Government and 1,20,000 equity
shares are held by Government of Maharashtra. Explain with reference to relevant provisions of
the Companies Act, 2013, whether SK Infrastructure Limited can be treated as Government
Company.

Ans. Government Company [Section 2(45) of the Companies Act, 2013]: Government Company
means any company in which not less than 51% of the paid-up share capital is held by-

(i) the Central Government, or

(ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more State Governments,

and the section includes a company which is a subsidiary company of such a Government
company.

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In the instant case, paid up share capital of SK Infrastructure Limited is 6,00,000 equity shares of
` 100 each. 200,000 equity shares are held by Central government and 1,20,000 equity shares are
held by Government of Maharashtra. The holding of equity shares by both government is 3,20,000
which is more than 51% of total paid up equity shares.

Hence, SK Infrastructure Limited is a Government company.

Q.9. Mr. Anil formed a One Person Company (OPC) on 16th April, 2018 for manufacturing electric
cars. The turnover of the OPC for the financial year ended 31st March, 2019 was about ` 2.25
Crores. His friend Sunil wanted to invest in his OPC, so they decided to convert it voluntarily
into a private limited company. Can Anil do so?

Ans. As per the provisions of Sub-Rule (7) of Rule 3 of the Companies (Incorporation) Rules, 2014, an
OPC cannot convert voluntarily into any kind of company unless two years have expired from
the date of its incorporation, except threshold limit (paid up share capital) is increased beyond
fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore
rupees.

In the instant case, Mr. Anil formed an OPC on 16th April, 2018 and its turnover for the financial
year ended 31st March, 2019 was ` 2.25 Crores. Even though two years have not expired from the
date of its incorporation, since its average annual turnover during the period starting from 16th
April, 2018 to 31st March, 2019 has exceeded ` 2 Crores, Mr. Anil can convert the OPC into a
private limited company along with Sunil.
Q.10. Jagannath Oils Limited is a public company and having 220 members. Of which 25 members
were employee in the company during the period 1st April 2006 to 28th June 2016. They were
allotted shares in Jagannath Oils Limited first time on 1st July 2007 which were sold by them on
1st August 2016. After some time, on 1st December 2016, each of those 25 members acquired
shares in Jagannath Oils Limited which they are holding till date. Now company wants to convert
itself into a private company. State with reasons:

(i) Whether Jagannath Oils Limited is required to reduce the number of members.
(ii) Would your answer be different if above 25 members were the employee in Jagannath Oils
Limited for the period from 1st April 2006 to 28th June 2017?

Ans. According to Section 2(68) of Companies Act, 2013, “Private company” means a company having
a minimum paid-up share capital as may be prescribed, and which by its articles,—

(a) restricts the right to transfer its shares;

(b) except in case of One Person Company, limits the number of its members to two hundred:

Provided that where two or more persons hold one or more shares in a company jointly,
they shall, for the purposes of this clause, be treated as a single member:

Provided further that—

 persons who are in the employment of the company; and

 persons who, having been formerly in the employment of the company, were members
of the company while in that employment and have continued to be members after the
employment ceased,

shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the company;

 Following the provisions of Section 2(68), 25 members were employees of the company
but not during present membership which was started from 1st December 2016 i.e. after
the date on which these 25 members were ceased to the employee in Jagannath Oils
Limited. Hence, they will be considered as members for the purpose of the limit of 200

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members. The company is required to reduce the number of members before converting
it into a private company.
 On the other hand, if those 25 members were ceased to be employee on 28th June 2017,
they were employee at the time of getting present membership. Hence, they will not be
counted as members for the purpose of the limit of 200 members and the total number
of members for the purpose of this sub-section will be 195. Therefore, Jagannath Oils
Limited is not required to reduce the number of members before converting it into a
private company.

Q.11. A, B and C has decided to set up a new club with name of ABC club having objects to promote
welfare of Christian society. They planned to do charitable work or social activity for promoting
the art work of economically weaker section of Christian society. The company obtained the
status of section 8 company and started operating from 1st April, 2017 onwards.

However, on 30th September 2019, it was observed that ABC club was violating the objects of its
objective clause due to which it was granted the status of section 8 Company under the
Companies Act 2013.

Discuss what powers can be exercised by the central government against ABC club, in such a
case?

Ans. Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to
promote the charitable objects of commerce, art, science, education, sports etc. Such company
intends to apply its profit in promoting its objects. Section 8 companies are registered by the
Registrar only when a license is issued by the Central Government to them.

Since ABC Club was a Section 8 company and it was observed on 30th September, 2019 that it
had started violating the objects of its objective clause. Hence in such a situation the following
powers can be exercised by the Central Government:

(i) The Central Government may by order revoke the licence of the company where the
company contravenes any of the requirements or the conditions of this sections subject to
which a licence is issued or where the affairs of the company are conducted fraudulently, or
violative of the objects of the company or prejudicial to public interest, and on revocation
the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the
register. But before such revocation, the Central Government must give it a written notice
of its intention to revoke the licence and opportunity to be heard in the matter.
(ii) Where a licence is revoked, the Central Government may, by order, if it is satisfied that it is
essential in the public interest, direct that the company be wound up under this Act or
amalgamated with another company registered under this section. However, no such order
shall be made unless the company is given a reasonable opportunity of being heard.
(iii) Where a licence is revoked and where the Central Government is satisfied that it is essential
in the public interest that the company registered under this section should be amalgamated
with another company registered under this section and having similar objects, then,
notwithstanding anything to the contrary contained in this Act, the Central Government
may, by order, provide for such amalgamation to form a single company with such
constitution, properties, powers, rights, interest, authorities and privileges and with such
liabilities, duties and obligations as may be specified in the order.

Q.12. An employee Mr. Karan signed a contract with his employer company ABC Limited that he will
not solicit the customers after leaving the employment from the company.

But after Mr. Karan left ABC Limited, he started up his own company PQR Limited and he started
soliciting the customers of ABC Limited for his own business purposes.

ABC Limited filed a case against Mr. Karan for breach of the employment contract and for
soliciting their customers for own business. Mr. Karan contended that there is corporate veil
between him, and his company and he should not be personally held liable for this.

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In this context, the company ABC Limited seek your advice as to the meaning of corporate veil
and when the veil can be lifted to make the owners liable for the acts done by a company?

Ans. Corporate Veil: Corporate Veil refers to a legal concept whereby the company is identified
separately from the members of the company.

The term Corporate Veil refers to the concept that members of a company are shielded from
liability connected to the company’s actions. If the company incurs any debts or contravenes any
laws, the corporate veil concept implies that members should not be liable for those errors. In
other words, they enjoy corporate insulation.

Thus, the shareholders are protected from the acts of the company.

However, under certain exceptional circumstances the courts lift or pierce the corporate veil by
ignoring the separate entity of the company and the promoters and other persons who have
managed and controlled the affairs of the company. Thus, when the corporate veil is lifted by the
courts, the promoters and persons exercising control over the affairs of the company are held
personally liable for the acts and debts of the company.

The following are the cases where company law disregards the principle of corporate
personality or the principle that the company is a legal entity distinct and separate from its
shareholders or members:

(i) To determine the character of the company i.e. to find out whether co-enemy or friend.
(ii) To protect revenue/tax
(iii) To avoid a legal obligation
(iv) Formation of subsidiaries to act as agents
(v) Company formed for fraud/improper conduct or to defeat law

Based on the above provisions and leading case law of Gilford Motor Co. Vs Horne, the company
PQR Limited was created to avoid the legal obligation arising out of the contract, therefore that
employee Mr. Karan and the company PQR Limited created by him should be treated as one and
thus veil between the company and that person shall be lifted. Karan has formed the only for
fraud/improper conduct or to defeat the law. Hence, he shall be personally held liable for the
acts of the company.

Q.13. ABC Pvt. Ltd., is a Private Company having five members only. All the members of the company
were going by car to Mumbai in relation to some business. An accident took place and all of them
died. Answer with reasons, under the Companies Act, 2013 whether existence of the company
has also come to the end?

Ans. Death of all members of a Private Limited Company, Under the Companies Act, 2013: The most
distinguishing feature of a company is its being a separate entity from the shareholders and
promoters who form it. This lends stability and perpetuity to the company form of business
organization. In short, a company is brought into existence by a process of law and can be
terminated or wound up or brought to an end only by a process of law. Its life is not impacted by
the death, insolvency or retirement of any or all shareholder(s) or director(s).

The provision for transferability or transmission of the shares helps to preserve the perpetual
existence of a company by allowing the constitution and identity of shareholders to change.

In the present case, ABC Pvt. Ltd. does not cease to exist even by the death of all its shareholders.
The legal process will be for the successors of the deceased shareholders to get the shares
registered in their names by way of the process which is called “transmission of shares”. The
company will cease to exist only when it is wound up by a due process of law.

Therefore, even with the death of all members (i.e. 5), ABC (Pvt.) Ltd. does not cease to exist.

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Q.14. Mr. Dhruv was appointed as an employee in Sunmoon Timber Private Limited on the condition
that if he was to leave his employment, he will not solicit customers of the company. After some
time, he was fired from company. He set up his own business under proprietorship and undercut
Sunmoon Timber Private Limited’s prices. On the legal advice from his legal consultant and to
refrain from the provisions of breach of contract, he formed a new company under the name
Seven Stars Timbers Private Limited. In this company, his wife and a friend of Mr. Dhruv were
the sole shareholders and directors. They took over Dhruv’s business and continued it. Sunmoon
Timber Private Limited files a suit against Seven Stars Timbers Private Limited for violation of
contract. Seven Stars Timbers Private Limited argued that the contract was entered between Mr.
Dhruv and Sunmoon Timber Private Limited and as company has separate legal entity, Seven
Stars Timbers Private Limited has not violated the terms of agreement. Explain with reasons,
whether separate legal entity between Mr. Dhruv and Seven Stars Timbers Private Limited will
be disregarded?

Ans. It was decided by the court in the case of Gilford Motor Co. Vs. Horne, that if the company is
formed simply as a mere device to evade legal obligations, though this is only in limited and
discrete circumstances, courts can pierce the corporate veil. In other words, if the company is
mere sham or cloak, the separate legal entity can be disregarded.

On considering the decision taken in Gilford Motor Co. Vs. Horne and facts of the problem given,
it is very much clear that Seven Stars Timbers Private Limited was formed just to evade legal
obligations of the agreement between Mr. Dhruv and Sunmoon Timber Private Limited. Hence,
Seven Stars Timbers Private Limited is just a sham or cloak and separate legal entity between Mr.
Dhruv and Seven Stars Timbers Private Limited should be disregarded.

Q.15. Narendra Motors Limited is a government company. Shah Auto Private Limited is a private
company having share capital of ten crores in the form of ten lacs shares of ` 100 each. Narendra
Motors Limited is holding five lacs five thousand shares in Shah Auto Private Limited. Shah Auto
Private Limited claimed the status of Government Company. Advise as legal advisor, whether
Shah Auto Private Limited is government company under the provisions of Companies Act,
2013?

Ans. According to the provisions of Section 2(45) of Companies Act, 2013, Government Company
means any company in which not less than 51% of the paid-up share capital is held by-

(i) the Central Government, or

(ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more State Governments, and the
section includes a company which is a subsidiary company of such a Government
company.

According to Section 2(87), “subsidiary company” in relation to any other company (that is to say
the holding company), means a company in which the holding exercises or controls more than
one-half of the total voting power either at its own or together with one or more of its subsidiary
companies.

By virtue of provisions of Section 2(87) of Companies Act, 2013, Shah Auto Private Limited is a
subsidiary company of Narendra Motors Limited because Narendra Motors Limited is holding
more than one-half of the total voting power in Shah Auto Private Limited. Further as per Section
2(45), a subsidiary company of Government Company is also termed as Government Company.
Hence, Shah Auto Private Limited being subsidiary of Narendra Motors Limited will also be
considered as Government Company.

Q.16. Mr. A is an Indian citizen and his stay in India during immediately preceding financial year is
for 115 days. He appoints Mr. B as his nominee who is a foreign citizen but has stayed in India
for 130 days during immediately preceding financial year.

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(i) Is Mr. A eligible to be incorporated as a One Person Company (OPC). If yes, can he give
the name of Mr. B in the memorandum of Association as his nominee to become the
member after Mr. A’s incapacity to become a member.
(ii) If Mr. A has contravened any of the provisions of the Act, what are the consequences?

Ans. As per the provisions of the Companies Act, 2013, only a natural person who is an Indian citizen
and resident in India (person who stayed in India for a period of not less than 120 days during
immediately preceding financial year) –

 Shall be eligible to incorporate an OPC

 Shall be a nominee for the sole member.

(i) In the given case, though Mr. A is an Indian citizen, his stay in India during the
immediately preceding previous year is only 115 days which is below the requirement of
120 days. Hence Mr. A is not eligible to incorporate an OPC.

Also, even though Mr. B’s name is mentioned in the memorandum of Association as
nominee and his stay in India during the immediately preceding financial year is more
than 120 days, he is a foreign citizen and not an Indian citizen. Hence B’s name cannot be
given as nominee in the memorandum.

(ii) Since Mr. A is not eligible to incorporate a One Person Company (OPC), he will be
contravening the provisions, if he incorporates one. He shall be punishable with fine which
may extent to ten thousand rupees and with a further fine which may extent to One
thousand rupees every day after the first during which such contravention occurs.

Q.17. Some of the creditors of Pharmaceutical Appliances Ltd. have complained that the company was
formed by the promoters only to defraud the creditors and circumvent the compliance of legal
provisions of the Companies Act, 2013. In this context they seek your advice as to the meaning of
corporate veil and when the promoters can be made personally liable for the debts of the
company.

Ans. Corporate Veil: Corporate Veil refers to a legal concept whereby the company is identified
separately from the members of the company.

The term Corporate Veil refers to the concept that members of a company are shielded from
liability connected to the company’s actions. If the company incurs any debts or contravenes any
laws, the corporate veil concept implies that members should not be liable for those errors. In
other words, they enjoy corporate insulation.

Thus, the shareholders are protected from the acts of the company.

However, under certain exceptional circumstances the courts lift or pierce the corporate veil by
ignoring the separate entity of the company and the promoters and other persons who have
managed and controlled the affairs of the company. Thus, when the corporate veil is lifted by the
courts, the promoters and persons exercising control over the affairs of the company are held
personally liable for the acts and debts of the company.

The following are the cases where company law disregards the principle of corporate personality
or the principle that the company is a legal entity distinct and separate from its shareholders or
members:

(i) To determine the character of the company i.e. to find out whether co-enemy or friend
(ii) To protect revenue/tax
(iii) To avoid a legal obligation
(iv) Formation of subsidiaries to act as agents
(v) Company formed for fraud/improper conduct or to defeat law

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Q.18. Explain clearly the doctrine of ‘Indoor Management’ as applicable in cases of companies
registered under the Companies Act, 1956. Explain the circumstances in which an outsider
dealing with the company cannot claim any relief on the ground of ‘Indoor Management’.
Ans. Doctrine of Indoor Management (Companies Act, 2013): According to the “doctrine of indoor
management” the outsiders, dealing with the company though are supposed to have satisfied
themselves regarding the competence of the company to enter into the proposed contracts are
also entitled to assume that as far as the internal compliance to procedures and regulations by
the company is concerned, everything has been done properly. They are bound to examine the
registered documents of the company and ensure that the proposed dealing is not inconsistent
therewith, but they are not bound to do more. They are fully entitled to presume regularity and
compliance by the company with the internal procedures as required by the Memorandum and
the Articles. This doctrine is a limitation of the doctrine of “constructive notice” and popularly
known as the rule laid down in the celebrated case of Royal British Bank v. Turquand. Thus, the
doctrine of indoor management aims to protect outsiders against the company.

The above mentioned doctrine of Indoor Management or Turquand Rule has limitations of its
own. That is to say, it is inapplicable to the following cases, namely:

(a) Actual or constructive knowledge of irregularity: The rule does not protect any person
when the person dealing with the company has notice, whether actual or constructive, of the
irregularity.

In Howard vs. Patent Ivory Manufacturing Co. where the directors could not defend the issue
of debentures to themselves because they should have known that the extent to which they
were lending money to the company required the assent of the general meeting which they
had not obtained.

Likewise, in Morris v Kansseen, a director could not defend an allotment of shares to him as
he participated in the meeting, which made the allotment. His appointment as a director also
fell through because none of the directors appointed him was validly in office.
(b) Suspicion of Irregularity: The doctrine in no way, rewards those who behave negligently.
Where the person dealing with the company is put upon an inquiry, for example, where the
transaction is unusual or not in the ordinary course of business, it is the duty of the outsider
to make the necessary enquiry.

The protection of the “Turquand Rule” is also not available where the circumstances
surrounding the contract are suspicious and therefore invite inquiry. Suspicion should arise,
for example, from the fact that an officer is purporting to act in matter, which is apparently
outside the scope of his authority. Where, for example, as in the case of Anand Bihari Lal vs.
Dinshaw & Co. the plaintiff accepted a transfer of a company’s property from its accountant,
the transfer was held void. The plaintiff could not have supposed, in absence of a power of
attorney that the accountant had authority to effect transfer of the company’s property.

Similarly, in the case of Haughton & Co. v. Nothard, Lowe & Wills Ltd. where a person
holding directorship in two companies agreed to apply the money of one company in
payment of the debt to other, the court said that it was something so unusual “that the
plaintiff were put upon inquiry to ascertain whether the persons making the contract had
any authority in fact to make it.” Any other rule would “place limited companies without
any sufficient reasons for so doing, at the mercy of any servant or agent who should purport
to contract on their behalf.”

(c) Forgery: The doctrine of indoor management applies only to irregularities which might
otherwise affect a transaction but it cannot apply to forgery which must be regarded as
nullity.

Forgery may in circumstances exclude the ‘Turquand Rule’. The only clear illustration is
found in the Ruben v Great Fingall Consolidated. In this case the plaintiff was the transferee

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of a share certificate issued under the seal of the defendant’s company. The company’s
secretary, who had affixed the seal of the company and forged the signature of the two
directors, issued the certificate.

The plaintiff contended that whether the signature were genuine or forged was apart of the
internal management, and therefore, the company should be estopped from denying
genuineness of the document. But it was held, that the rule has never been extended to cover
such a complete forgery.

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