The person entering into a transaction with the company only needed to satisfy that his proposed transaction is not inconsistent with the articles and memorandum of the company. He is not bound to see the internal irregularities of the company and if there are any internal irregularities than a company will be liable as the person has acted in the good faith and he did not know about the internal arrangement of the company.
The rule basically is based upon obvious reason of convenience in business relations. Firstly, the articles of association and memorandum are public documents and they are open to public for inspection. Hence, an outsider is presumed to know the constitution of a company, but what may or may not have taken place within the doors that are closed to him.
Royal British Bank V. Turquand  6 E&B 327
Directors of a company were authorized by articles to borrow on bonds such sums of money as should from time to time, by a resolution of company in general meeting, be authorized to be borrowed. The directors gave a bond to T without the authority of any such resolution.
The question arose whether the company was liable on the bond?
Held: Company was liable on the bond, as T was entitled to assume that the resolution of company in general meeting had been passed.
1. Where the outsider had knowledge of irregularity.
2. No knowledge of articles
Rama Corporation V. Proved Tin & General Investment company (1952)
Q was a director in investment company.He, purporting to act on behalf of company, entered into a contract with the Rama Corporation and took a cheque from the latter. The articles of company did provide that directors could delegate their powers to one of them, but Rama Corporation had never read the articles.
Later, it was found that the directors of company did not delegate their powers to Q. Plaintiff relied on the rule of indoor management.
Held: They could not be liable, because they even did not know that power could be delegated.
Ruben V. Great Fingal Consolidated (1906)
Secretary of company forged signatures of two directors required under articles on share certificate and issue it without authority, applicants were refused registration of company.
Held: The certificate was held to be nullity and the holder of certificate was not allowed to take advantage of this doctrine.
Al Underwood V. Bank of Liverpool (1924)
A person was the sole director and principle shareholder of company and hence paid into his own account cheque drawn in favour of the company.
Held: The bank should have made inquiries as to power of directors. The bank was put upon an inquiry and was accordingly not entitled to rely upon the ostensible authority of director.
Varkey Souriar V. Keraleeya Banking co. Ltd.(1957)
The Kerala High Court held that this doctrine cannot apply when the question is not on to the scope of power exercised by an apparent agent of a company but is in regard to the very existence of an agency.