Kids And Fnance

Doctrine of indoor management

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 of that company. It sets out the (a) object clause, (b) name clause, (c) registered office clause, (d) liability clause and (e) capital clause; whereas the articles of association enumerate the internal rules of the company under which it will be governed.

Undoubtedly, both memorandum of association and the articles of association are public documents in the sense that any person under section 610 of Indian company act, 1956 may inspect any document which will include the memorandum and articles of the company kept by the registrar of companies in accordance with the rules made under the destruction of records act, 1917 being documents filed and registered in pursuance of the act. As a consequence, the knowledge about the contents of the memorandum and articles of a company is not necessarily restricted to the members of the company alone. Once these documents are registered with the registrar of companies, these become public documents and are accessible by any members of the public by paying the requisite fees. Therefore, notice about the contents of memorandum and articles is said to be within the knowledge of both members and non-members of the company. Such notice is a deemed notice in case of a 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 perused 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 alleging that he did not know that the constitution of the company rendered a particular act or a particular delegation of authority ultra vires.

The ‘doctrine of constructive notice’ is more or less an unreal doctrine. It does not take notice of the realities of business life. People know a company through its officers and not through its documents. The courts in India do not seem to have taken it seriously though. For example, in Dehra Dun Mussorie Electric Tramway Co. v. Jagmandardas, the Allahabad high court allowed an overdraft incurred by the managing agent of a company when under the articles the directors had no power to delegate their borrowing power.

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 this doctrine “persons dealing with the company are entitled to presume that internal requirements prescribed in memorandum and articles have been properly observed”. A transaction has two aspects, namely, substantive and procedural. An outsider dealing with the company can only find out the substantive aspect by reading the memorandum and articles. Even though he may find out the procedural aspect, he cannot find out whether the procedure has been followed or not. For example, a company may have borrowing powers by passing a resolution according to its memorandum and articles. An outsider can only found out the borrowing powers of the company. But he cannot find out whether the resolution has in fact been passed or not. The outsiders dealing with the company are presumed to have read and understood the memorandum and articles and to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the memorandum and articles. They can presume that all is being done regularly.

The doctrine of indoor management is also known as the TURQUAND rule after Royal British Bank v. Turquand. In this case, the directors of a company had issued a bond to Turquand. 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 amount of the bond from the company on the ground that he was entitled to assume that the resolution was passed.

In one of the case the rule was stated thus: “If the directors have the power and authority to bind the company but certain preliminaries are required to be gone through on the part of the company before that power can be duly exercised, and then the person contracting with the directors is not bound to see that all these preliminaries have been observed. He is entitled to presume that the directors are acting lawfully in what they do.”

In another case where the plaintiff sued the defendant company on a loan of Rs.1,50,000, it was held that where the act done by a person, acting on behalf of the company, is within the scope of his apparent or ostensible authority, it binds the company no matter whether the plaintiff has read the document or not. In this case among other things the defendant company raised the plea that the transaction was not binding as no resolution sanctioning the loan was passed by the Board of directors. The court after referring to turquand’s case and other Indian cases, held that the passing of such a resolution is a mere matter of indoor or internal management and its absence under such circumstances, cannot be used to defeat the just claim of a bona fide creditor.

The rule is based on public convenience and justice and the following obvious reasons:

1.     the internal procedure is not a matter of public knowledge. 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.     the lot of creditors of a limited company is not a particularly happy one; it would be unhappier still if the company could escape liability by denying the authority of officials to act on its behalf.

Exceptions to the doctrine of indoor management:

The exceptions to the doctrine of indoor management are as under:

1.     Knowledge of irregularity: when a person dealing with a company has actual or constructive notice of the irregularity as regards internal management, he cannot claim benefit under the rule of indoor management. He may in some cases, be himself a part of the internal procedure. The rule is based on common sense and any other rule would encourage ignorance and condone dereliction of duty.

T.R Pratt (Bombay) Ltd. V. E.D. Sassoon & Co. Ltd., Company A lent money to Company B on a mortgage of its assets. The procedure laid down in the articles for such transactions was not complied with. The directors of the two companies were the same. Held, the lender had notice of the irregularity and hence the mortgage was not binding.

In Howard v. Patent Ivory Co, the directors had the authority under the articles to borrow only up to £1000 without the resolution of general meeting. For any amount beyond £1000, they needed the consent of general meeting. But the directors borrowed £3500 from themselves without the consent of general meeting or shareholders and accepted debentures. It was held that they had knowledge of internal irregularity and debentures were good only up to £1000.

2.     Negligence: where a person dealing with a company could discover the irregularity if he had made proper inquiries, he cannot claim the benefit of the rule of indoor management. The protection of the rule is also not available where the circumstances surrounding the contract are so suspicious
as to invite inquiry, and the outsider dealing with the company does not make proper inquiry. If, for example, an officer of a company purports to act outside the scope of his apparent authority, suspicion should arise and the outsider should make proper inquiry before entering into a contract with the company.

Anand Bihari Lal v. Dinshaw & Co, the plaintiff, in this case, accepted a transfer of a company’s property from its accountant. Held, the transfer was void as such a transaction was apparently beyond the scope of the accountant’s authority. The plaintiff should have seen the power of attorney executed in favour of the accountant by the company.

3.     Forgery: the rule in turquand’s case does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers. The leading case on the point is :

Ruben v. Great Fingall Consolidated Co., the secretary of a company issued a share certificate under the company’s seal with his own signature and the signature of a director forged by him. Held, the share certificate was not binding on the company. The person who advanced money on the strength of this certificate was not entitled to be registered as holder of the shares.

4.     Acts outside the scope of apparent authority: if an officer of a company enters into a contract   with a third party and if the act of the officer is beyond the scope of his authority, the company is not bound. In such a case, the plaintiff cannot claim the protection of the rule of indoor management simply because under the articles the power to do the act could have been delegated to him. The plaintiff can sue the company only if the power to act has in fact been delegated to the officer with whom he entered into the contract.

Kreditbank Cassel v. Schenkers Ltd,a branch manager of a company drew and endorsed bills of exchange on behalf of the company in favour of a payee to whom he was personally indebted. He had no authority from the company to do so. Held, the company was not bound. But if an officer of a company acts fraudulently under his ostensible authority on behalf of the company, the company is liable for his fraudulent act.

Conclusion: Thus the doctrine of indoor management seeks to protect the interest of the shareholders who are in minority or who remains in dark about whether the working of the internal affairs of the company are being carried out in accordance with the memorandum and articles. It lays down that persons dealing with a company having satisfied themselves that the proposed transaction is not in its nature inconsistent with the memorandum and articles, are not bound to inquire the regularity of any internal proceeding.

No Comments >>

BONUS BONAZA – Failure of ethics or economic model?

Is there a failure in moral and ethics within the Financial sector or a total miss-management by global leaders to accept the responsibility to create a sustainable global economic growth?

What does it mean to create a sustainable growth? Does this mean regulations and laws to eliminate greed, or as in other areas, to change mentality amongst global leaders together with financial leaders, to create a more sustainable growth.

We run anti-smoking campaigns to make people smoke. We start anti-drug campaigns to stop drug use and traffic. We even try to run campaigns to reduce obesity problems in the industrial world. Do these campaigns work, or is it just a way to do tell we are thinking of this and will do something about it, but we do not know how yet.

Are we doing the same with the Financial World today? Governments and think tanks around the world write in various media about responsibility and reactions to bonuses and rewards amongst the financial players. We tell them how bad this is, and something needs to be done with it, and soon.

However, we come short to see some real action – maybe because we do not know what to do about it, or is it just ignorance?

News have been full of Financial stories this year. Starting with the financial crisis packages and discussion on how to save the banking and financial systems around the world. Different models have been proposed, but all agreed that we need to save the banks, otherwise the global economy would collapse and create a recession of unheard dimensions. We can all agree on the last statement, however, we disagree on the means to correct the failures. Most country authorities made large tax payer contributions to the banks and financial institution which essentially did not have cash enough to pay their debts to each other more or less.

Financial instruments deemed perfect by themselves alone,  not proven to work in a global social economic model  however, had collapsed and no one trusted no one anymore. The economy contracted and did not work anymore.

I remember my first economy class, the teacher said that economy was about circulation of money.

Well, does present economic ensure that the money is circulated, or does it have a tendency of piling up somewhere?

The latest news is that the Royal bank of Scotland plans gigantic bonuses to their managers

RBS plans to give between 1 and 5 million British Pounds to each Bank manager in their system.

The same bank was saved in October 2008 and is now owned 70% by the British state.

The state woned  Royal Bank of Scotland (RBS)  plans to give record high bonuses up to 5 million punds to their top management in the bank.

In average the bonus for their employees will be around 200.000 pounds each.

The 20 top managers to be given the highest bonuses will get around 800.000 to 4 million pounds each.

The planned bonuses are higher than the amounts paid out at the top of the financial boom in 2007. They are around 66 percent higher than was paid out last year.

RBS was on the verge of collapse last year in August, and had to be given state supprt to survive the crisis that was brought on them.

The british department of Finance or the Treasury put in over 200 billion pounds to get the bank up and running again, and this gives the state a 70% ownership in the bank at the moment.

Again this proposal of bonus payment from RBS will be in direct collion course with UK Financial Investment, the government office in charge of following up state investments in banks amongst other things. They inspect and keep track on how the tax payers money are invested in the banks and they have to approve the bonus payment proposals from RBS.

The plans from RBS and other banks revealed recently about the bonus payment is a sign that the bonus culture is back again and we have learned nothing from the crisis at all. This happens less than a year after the collapse of the same banks was a given fact.

The economic models are the same, the people are the same and the mentality, moral and ethics are back to its 2008 level again.

It is expected that RBS will do massive lobbying to get approval to perform the bonus payments proposed. They will use the same old arguments used earlier, that the managers on top level are getting offers from their rivals of higher payments and it is therefore a need to compensate to keep their talents.

These are the same talents that brought up on us the financial crisis in 2008, and still deemed still to be the best money makers. Of course they are, given that we proceed with the same economic models as before, driving the same highway that made it possible to over speed and almost kill everybody around you.

There is no sign of moral or ethical improvement which was expected from this crisis. There is still no sign of change in the way the financial world is behaving and the greed that was the signs in 2007 and 2008.

Several employees in RBS staff in Singapore left work last week in the fear they would get smaller bonuses than expected.

Well, maybe this is what has to happen, and the migration of workforce will have to take place, but in the end there will be no places to run as more and more banks accept the fact that there is a limit to how much you are worth as a human to the humanity and its way to prosperity.

RBS has already provoked anger over a 10 million pound proposed bonus package to the CEO of the bank, Stephen Hester, given that he gets the bank up and running again.

Secretary of state in the department of Finance has contacted all boards in all the banks in Great Britain and reminded them that they should build up reserves instead of paying out bonuses to management and employees. But at the same time the Department of Finance is cautious to take any decisions that can harm the finance sector at a time where the banks still struggle to build up their balances.

None of the british banks have at the moment taken any final decision on how large the bonus packages should be at the year end.

American banks have already put aside large sums of money for bonus payments this year.

Last week JP Morgan revealed that they are willing to pay out over 30 million dollars for salaries and bonuses to their employees after a record high surplus of 4 billion US Dollars in the last three months in 2009.

The largest insurance company in the world, AIG paid out over 165 billion US Dollars in bonuses in March this year. This created chock waves and scandal at that time, but nothing more than that. The government wrote some letters and commented the act in the media, but the company went on and did what they deemed necessary to keep their employees happy. Set moral aside, and continue the happy games we have played in the last year. Uncle Sam has given us money, and then we do whatever we like with it.

Around 200 billion US dollar put into the same department last year to save it, was effectively used to pay the bonuses proposed, well done US federals, we taught them a lesson there did we not?

AIG got the most of the US crisis package since they went with a loss of almost 1 billion US Dollar every day during the last quarter in 2008.

The same people in charge now, as was in 2008, give themselves a tap on the shoulders, well done, we got the money, the government saved our bank, lets reward ourselves to be able to sell the story to the government.

All this are signs that the Financial sector has not learned nothing. Most important of all is to see that Governments around the world has not taken this opportunity to properly regulate and ensure a moral aspect of the Financial sector.

This was a once in a decade chance for the authorities around the world to unite and get the Financial sector to become sustainable wit
h respect to global development, and not only for their own enrichment.

The message sent out from the Financial sector as well as governments is that there is no hope for sustainable global financial development and that we have to get prepared for the next recession or even depression with a decade or so. Maybe the cycles for these recessions will decrease as globalization takes more and more over, and makes information and capital flow to act faster than before.

The time this last recession took to spread to global phenomena was the fastest ever, and we have to expect it will be more instant next time.

Enrichment of the few does not work anymore, as global economy also will demand a more sharing of the financial positive development.

The G20 countries needs to come up with a plan on how to bring not only their own economies up and running, but to ensure even the poor world gets to take part of this development. Most of all, it has to be a sustainable economic development. Economy can not isolate itself from the social development, as both are mutual dependent upon each others.

There is a moral aspect in this, which has to be guided by the social development, brought into the social economic models brought forward in the next years to come.

However, the recent actions taken by major banks all over the world by announcing the need to pay more money to retain their employers, tells us we need to start there first.

There has to be set a global framework for how the financial sector should reward their players, and new measures have to be set forward at this moment. I do not have the answers to this, and leave this up to the private or governmental think tanks around the world to illuminate the common people on this issue.

In December there is going to be a summit in Copenhagen to talk and agree upon environmental issues, and to look closer into the Kyoto agreement and what targets we are to set in the industrial world.

These targets both have a cost and a gain, both environmental and economic. But last but not least a social aspect to it.

If  this summit do not manage to link the financial sector into their environmental targets as well as the social aspect, it is doomed to fail.

There is no way we will be able to make a sustainable economic model unless we bring all segments of the world with us here, industrial, developing and third world.

We can not allow the poor take the bill and pay for the miss-management by the industrial and developing world.

No Comments >>

The Indian economy went through a severe turmoil after the assassination of former Prime Minister Mr. Rajiv Gandhi. The whole country suffered due to the staggering condition of the economy. The rising burden of debts to the World Bank was the major concern of the country. Thanks to the Narasimha Government, the reforms introduced by this government pulled the entire country out of that pitiable circumstance. The banking system got reformed and the economy came out well. Today, we have not only emerged as survivors but have also made ourselves tougher than ever.

The banks are being made customer friendly. New innovative plans are planned and implemented these days, keeping in view the interest of the customers, and are replacing the old, rigid schemes. Flexibility, user-friendliness, ease and gain are the key aspects which are being kept in mind before designing the new plans of action for the Indian banks.

Account types like saving account, current account, recurring deposits are being widely used by the people of India who once were reluctant to trust the banks for their money. The banking system has not only gained the faith of the customers, but had also made itself the best possible mode to treasure, multiply and transfer the hard-earned money of the customers.

Current account has been tailor made for those customers who carry out huge transactions on a daily basis. Businessmen, corporate executives, small and large scale organisations use their current account to carry out their transactions. A current account is primarily for the purpose of transactions. The low current account interest rate have attracted the entrepreneurs willing to invest their money . The businesses in India are flourishing and the sole reason behind their rapid success is the affordable interest rates.

Popular banks in India like the Punjab National Bank, State Bank of India, HDFC etc. have already set the stage for the enhanced profit margin by following the guidelines of customer-friendly banking. The sole aim of these banks is to channel their working in a way that can appease their prospective customers.

The foreign investors, who were let down by the Indian companies few years ago in terms of quality of services, are now quite pleased and India is now the new hub for investors from all parts the world. The employment opportunities have in turn increased manifold. Thus we have a sound working economy and a satisfied Indian public. All this has been made possible by the reforms introduced by the banking system in India.

The savings account in India has also opened new vistas for the customers. These accounts allow the customers to accumulate their funds and earn interests. The high interest saving accounts have helped a number of people maintain the funds and enjoy maximum benefits. The customer services of these banks offer assistances to the customers on the matters like cheque book request, statement request, e-cheque, demand draft, balance enquiry, funds transfer and online applications for all types of loans, fixed deposit schemes etc. The keen-to-help attitude and all-time assistance make the customers feel comfortable and attended.

On looking back, we now realise how many milestones we have sped past. There was a day when we were a debtor to the International Monetary Fund (IMF).But now we have turned from a debtor to a creditor. This seemed as a dream few years ago. But now we are facing a bright, positive reality.

With the lucrative attributes of the Indian Banking system like the appeasing current account interest rate and the keen-to-help customer services, India has touched new heights in the world economic panorama. The day is not far when we will be the forerunner in the race of the economies of the world.

No Comments >>