Analysis of Indoor Management Rule

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Law Assignment Question

     “After that… all that the directors do with reference to what I may call the indoor management of their own concern, is a thing known to them and known to them only ..”

                                Lord Hatherly in Mahony v East Holyford Mining Co (1874-75), LR 7 HL 869     

Critically analyse and contrast the common law and statutory indoor management rule with reference to appropriate sections of the Corporations Act (2001)  and case law. Students should also look at the limitations and exceptions to the use of the indoor management rule. 

Law Assignment Solution

 

The concept of indoor management rule came into existence about 150 years from now. The role that indoor management rule plays is exactly the opposite of the role that is played by the doctrine of constructive notice. The indoor management rule protects any outsider from the actions taken by a company. This can be explained in simple terms. If a person wants to do business with a company then his liability is restricted to keeping a check only on the terms related to his entering into business with the company. His job is to make sure that those terms fall in accordance to the memorandum and articles of the company. He is not entitled to check any internal complications or deficiencies existing within the company. If under any circumstances, it is revealed that there were certain irregularities within the company then the liability will of the company and not of the individual as he had just acted in good faith without having any information about the complications happening within the company. This rule is on the basis of proving convenience while doing business. The article of association and the memorandum of association are two documents which are known as public documents because they are open for the public and people can refer to them any time for any kind of inspection. Thus a person who is new to the company or an outsider is expected to know anything that is publically displayed about the company but it cannot be expected for him to know what is happening within the company behind the closed doors. This rule is termed as the Indoor Management Rule (Amoolya, 2015)……………………..

 
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