Introduction

We were given by an assignment to analyze a case called Shanta Jute Mills

Ltd vs. Occidental Bank Ltd, to identify the facts of the case and to advise
the parties according to the leading cases and Turquand rule.

Doctrine of 'Indoor Management'

The doctrine of Indoor management, popularly known as the Turquand’s rule
initially arose some 150 years ago in the context of the doctrine of
constructive notice. The rule of Doctrine of Indoor Management is conflicting
to that of the principle of Constructive Notice. The latter seeks to protect the
company against outsiders; the former operates to protect outsiders against
the company.

The Doctrine of Indoor Management 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. In other words, while
persons contracting with a company are presumed to know the provisions of
the contents of the memorandum and articles, they are entitled to assume
that the provisions of the articles, they are entitled to assume that the
officers of the company have observed the provisions of the articles. It is no
part of duty of any outsider to see that the company carries out its own
internal regulations.

Leading cases of Turquand’s rule

The rule had its genesis in the case of Royal Bank v Turquand. In this case
the Directors of the Company were authorized by the articles to borrow on
bonds such sums of money as should from time to time by a special
resolution of the Company in a general meeting, be authorized to be
borrowed. A bond under the seal of the company, signed by two directors
and the secretary was given by the Directors to the plaintiff to secure the
drawings on current account without the authority of any such resolution.
Then Turquand sought to bind the Company on the basis of that bond. Thus
the question arose whether the company was liable on that bond.

The Court of Exchequer Chamber overruled all objections and held that the
bond was binding on the company as Turquand was entitled to assume that
the resolution of the Company in general meeting had been passed.

Application of the rule by the Indian court

The Turquand's rule has been approved and followed by

➢ Varkey Souriar v. Keraleeya Banking Co. Ltd

➢ Lakshmi Ratan Cotton Mills Co. Ltd, v. J. K. Jute Mitts Co. Ltd
➢ Manasube & Co. (P.) Ltd. V. Commissioner of police

Exceptions to the Rule

The rule of doctrine of indoor management is however subject to certain
exceptions. In other words, relief on the ground of ‘indoor management’
can’t be claimed by an outsider dealing with the company in the following
circumstances:
Ø where the outsider has knowledge of Irregularity
Ø Suspicion of Irregularity
Ø Forgery
Ø Representation through Articles
Ø Acts outside apparent authority

Issues regarding the case

About the companies & Articles of Association-

  Mita Cotton Mills Ltd is the subsidiary company of Shanta Jute Mills
Ltd., a public limited company.
 Mr. Kader was a director of a Shanta Jute Mills Ltd and was also the
director of Mita Cotton Mills Ltd.
 The Articles of Association of Shanta Jute Mills Ltd. provided that the
directors were entitled to borrow money and it also provided that a
power to borrow money could be delegated to the directors of its
subsidiary companies to if it is approved by the board resolution.
 The Articles further provided that if any special terms in the loan
agreements is inserted, that has to be approved by the board
resolution in prior.

Regarding the previous loan agreements-

 In between 2003-2008 Mita Cotton Mills Ltd had borrowed money on

short term loan agreements for five times from Occidental Bank Ltd
and had repaid the loans within due time. On each occasion Mr. Kader
as the director of Mita Cotton Mills Ltd. signed the loan agreements on
behalf of the company.
 Each of these loan agreements contained terms that entitled the Bank
(Occidental Bank Ltd.) to claim default interest of 10% in the event of
failure to repay the dues in time.
 In 2005 Mita Cotton Mills Ltd. was having some financial crisis, and for
this reason the parent company Shanta Jute Mills Ltd. had repaid the
final installment of a loan agreement.

Regarding the current loan agreement-

 On 30.6.2009 the company (Mita Cotton Mills Ltd.) failed to repay its
first installment under the loan agreement and accordingly one months
 of grace period was allowed to the company. Just after the expiration
of one month of grace period the company (Mita Cotton Mills Ltd.) went
bankrupt. Therefore the assets of the company (Mita Cotton Mills Ltd.)
as well as Shanta Jute Mills Ltd. as the parent company were now
subject to repay the debts of the creditor of the company (Mita Cotton
Mills Ltd.) Occidental Bank Ltd. claimed the amount of the loan
agreement, plus a default interest of 10% for the grace period of one
month and a default interest of 15% from thereafter from Shanta Jute
Mills Ltd.
 Shanta Jute Mills Ltd. refused the claim of Occidental Bank Ltd. alleging
that the loan agreement between Mita Cotton Mills Ltd and Occidental
Bank Ltd. dated 1.1.2009 was concluded without any proper authority
of Mr. Kader as the director of Mita Cotton Mills Ltd. No such board
resolution was passed delegating the power to borrow money to Mr.
Kader as the director of Mita Cotton Mills Ltd. They (Shanta Jute Mills
Ltd) also contended that inserting a special terms in the loan
agreement also required approval of the board resolution which was
not obtained, so Shanta Jute Mills was not obliged by the terms of the
loan agreement.
 It was revealed that among the five loan agreements between Mita
Cotton Mills Ltd and Occidental Bank Ltd. during the years 2003-2008
only two loan agreements were approved by the board resolution,
delegating Mr. Kader to borrow loan on behalf of Mita Cotton Mills Ltd.
 It was further discovered that one of the loan agreement concluded in
2003, wherein Shanta Jute Mills Ltd. ultimately paid the final
installment was not approved by the board resolution in prior
delegating Mr. Kader to borrow money and the special terms inserted
in that loan agreement was also not approved by the board resolution
in prior.
Discussions

Arguments for Occidental Bank Ltd.

Facts considered making arguments for Occidental Bank Ltd are as

follows.

 In between 2003-2008 Mita Cotton Mills Ltd had borrowed money on

short term loan agreements for five times from Occidental Bank Ltd
and had repaid the loans within due time. On each occasion Mr. Kader
as the director of Mita Cotton Mills Ltd. signed the loan agreements on
behalf of the company.
 In 2005 Mita Cotton Mills Ltd. was having some financial crisis, and for
this reason the parent company Shanta Jute Mills Ltd. had repaid the
final installment of a loan agreement.
 The Articles of Association of Shanta Jute Mills Ltd. provided that the
directors were entitled to borrow money and it also provided that a
power to borrow money could be delegated to the directors of its
subsidiary companies to if it is approved by the board resolution.
 As the Articles of Association is a public document, it is open to public
inspection. But the details of internal procedure are not thus open to
public inspection. Based on the rule of Doctrine of Indoor
Management, it has been said that 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.
 According to the Turquand rule, thus the company will consequently
be bound by the loan agreement done with Occidental Bank Ltd
even if the internal requirements and procedures have not been
complied with.

Consequently the Occidental Bank Ltd signed in the loan agreement in a

good faith assuming that Mr. Kader had fulfilled the internal requirements
and procedures before borrowing. Therefore, the Bank won’t suffer for the
noncompliance of the internal requirements of the company.

The parent company had repaid a final installment of their loan agreement
previously. As Mita Cotton Mill Ltd. went bankrupted, the parent company is
bound to this agreement instead of the bankrupted company and they will
fulfill the agreement. Now the fact is, the repayment of the loan was not
approved by a board resolution. Again Mr. Kader was a director of the parent
company. According to the Article of association of Shanta Jute Mills Ltd. The
directors were entitled to borrow money and he can easily repay the loan on
behalf of the parent company. There is no need for a board resolution. Under
this circumstance, the bank has served a notice upon Shanta Jute Mills Ltd.
claiming the amount of the loan agreement and they take the appropriate
action. As they are outsiders they have no idea what is going on inside the
company and they will not suffer for their lack of conformity in their internal
affairs. So, the company cannot refuse the claim of the plaintiff. (Case
Reference: Lakshmi Ratan Lal Cotton Mills vs. JK Jute Mills Co, 1957)

Arguments for Shanta Jute Mills Ltd

Facts considered making arguments for Shanta Jute Mills Ltd are as
follows.

 The assets of the company (Mita Cotton Mills Ltd.) as well as Shanta
Jute Mills Ltd. as the parent company were now subject to repay the
debts of the creditor of the company (Mita Cotton Mills Ltd.)
Occidental Bank Ltd. claimed the amount of the loan agreement, plus a
default interest of 10% for the grace period of one month and a default
interest of 15% from thereafter from Shanta Jute Mills Ltd.
 No such board resolution was passed delegating the power to borrow
money to Mr. Kader as the director of Mita Cotton Mills Ltd.
 Shanta Jute Mills Ltd also contended that inserting a special terms in
the loan agreement also required approval of the board resolution
which was not obtained.
 If it is an internal requirement that a certain act should be approved by
special resolution, the Turquand rule will therefore not apply in
relation to that specific act, since a special resolution is registered
with the Registrar of Companies in Bangladesh, according to the
section 88 of the Companies Act 1994 and is deemed to be public
information.
 Therefore a default interest of 10% for the grace period of one month
and a default interest of 15% from thereafter as of 31.12.2009, such
specific act should be approved by special resolution and become a
content of public information, it should be known by the Occidental
Bank Ltd before they reach with an agreement to Mita Cotton Mills Ltd.
 Shanta Jute Mills Ltd refused the claim that inserting such default
interest as special terms in the loan agreement was not obtained the
approval of the board resolution.
According to the above information Shanta Jute Mills will not obliged by
the terms of the loan agreement.