principles of internal management (Theory of Internal Management)
According to the principle of internal management, every person dealing or contracting with the company has the right to assume that all the work is done regularly so far as the internal proceedings of the company are concerned. It is never the duty of an outsider to see that the internal proceedings of the company are going on as per rules. But it must be his responsibility that he must find out whether the proposed transaction or agreement is not inconsistent with the public documents of the company (Councilor Memorandum and Councilor’s Article). The basic premise of the internal management theory is that if a person deals or contracts with the company, relying on the public documents of the company (Councils Memorandum and Councilor Articles), then he has the right to assume that all the internal management related matters of the company. Rules and procedures have been followed. If for any reason those rules or proceedings are not followed, then the responsibility will be on the company. The rights of the said person will not be affected by this but will remain as they are.
The theory of internal management was propounded later in the year 1856 titled Royal British Bank v Turquand. In this case, in the Articles of the Company, the directors have the right to issue bonds or provided that a general resolution is passed in the meeting of the members. The directors issued turquand bonds but did not get the resolution passed for the same in the meeting of the members of the company. It has been decided by the court that Turquand had the right to assume that the bonds issued by the operators were authorized by ordinary motion. Therefore, Turquand has the right to receive money from the company on the basis of the above bonds.