The Doctrine of Constructive Notice existed to allow outsiders to inspect the documents of companies. People who were going to partner with the company or work with them would be able to examine the documents, and then based on the findings make their decision. This way any outsider of the company who work with a company will know the form of rights of the Directors of the company and are aware of it. However, in some cases, there were outsiders who did not have any knowledge about the internal procedures, and hence could not say if they were complied with. The indoor management rule IMR was established precisely for this purpose. The first application understanding of the Indoor Management Rule was in the case of the Royal British Bank v. Turquand. It was in this case, the Court first allowed for outsiders to make assumptions on whether the company has complied with needed rules and legislations. In this case, the company directors have given a banker guarantee for borrowing which did not fall under the usual rules for shareholder. Using the absence of shareholder approval as a reason, the company wanted to avoid payment. The court rejected this assumption and found the company to have understood such transactions to be authorized. The basis and the need for understanding company working is what hence led to the Indoor Management Rule. Under the IMR, the outsiders who are associating with the company will be able to make some reasonable assumptions on the regular working of the company. The outsiders would be able to decide whether the company working is consistent or reliable as per their needs. Internal consistency of decisions can be evaluated by the outsider. In order for indoor management rules to be understood properly, it is necessary to understand how the common law, inquiry exception is also applied.
Primarily, the rule is applicable in such areas, where there are some procedural conditions to be fulfilled with respect to the company’s board of directors wanting to give an agent some actual authority. Directors must be properly appointed, and must have convened proper board meetings as well. The board members must be well informed, and the quorum should exist for the directors to make a decision. Now, a bona fide outsider would be allowed to expect these conditions to be implemented in order to be assured of regularity in working. Under the IMR, outsider deals with the company usually happens on good faith. Here, there is no need for any outsider to notice or have some reasonable grounds to anticipate irregularity or impropriety in the company’s internal working.