Indoor management rule

A common law rule according to which persons may assume that acts of internal management affecting the business dealings they have with a company in good faith have been conducted in a regular way so that any contracts they enter into are valid.

The indoor management rule is now included in Part 2B.2 of the Corporations Act 2001 (Cth). Section 128 outlines the entitlement to make assumptions, and section 129 specifies what assumptions can be made.

The indoor management rule and its statutory provision aim to protect persons contracting with companies from liability or loss where that company’s duties have been executed illegally or unconscionably. Persons may assume that acts within a company’s constitution and powers have been properly and duly performed, and are not personally required to ensure that acts of internal management are regular.

However, persons contracting with companies retain some responsibility to conduct themselves carefully in dealings. Any lender that did not conduct a proper search of a borrowing company’s records or inquire about the identity and powers of directors will significantly reduce their chances of being able to rely on the indoor management rule protections. An ASIC search should be commissioned to ensure that people executing a document (i.e. directors, secretaries) appear in ASIC’s records to hold the claimed position.

Additionally, where persons contracting knew or suspected wrongdoing and continued to deal with the company, the Act and rule will not provide protection.