Doctrine of Constructive Notice and Indoor Management

The Doctrine Of Constructive Notice

There are two important documents that must be registered with the registrar of companies: the Articles of Association (AOA) and the Memorandum of Association (MOA). After these documents are registered, they become public documents. From then, they are open for inspection by the public in the office of the Registrar of the Companies, on the payment of a prescribed fee.

The Article of Association tells about the internal affairs of the company, while the Memorandum of Association explains the external affairs of the company. These documents are open for inspection to all outsiders and investors when they enter into a contract with the company. It is presumed in the eyes of the law that if anyone enters into a contract with the company, they have gone through these documents, even if they are not aware of what is written there. “Mistake of fact is excusable, but mistake of law is not excusable.” Any person entering into a contract should be well aware of the rights and conditions of the company. This imputation of knowledge is known as Constructive Notice of the Memorandum and Articles of Association of a company.

Importance of the Doctrine

This doctrine operates against outsiders for dealing with the company and prevents them from alleging that they do not know that the memorandum and the articles of the company rendered a particular act ultra vires. However, this doctrine is subject to limitations contained in the Principle of Indoor Management.

Kotla Venkata Swamy v. Ramamoorthy, AIR 1934 Mad. 579

The AOA of a company requires that all the deeds should be signed by the managing director, the secretary, and the working director on behalf of the company. The plaintiff accepted a deed of mortgage that was executed by the secretary and a working director only. The court declared the mortgage invalid and held that the plaintiff had constructive notice of the contents of the Articles of Association of the respective company.

Rajendra Nath Datta v. Shibendra Nath Mukherjee (1982)(52 Comp. Cas. 293 Cal.)

The Court in this case decided that the AoA of a company is a public document and anyone who is dealing with the company must have taken notice of the Articles. Every person dealing with the company is presumed to know the contents of the Memorandum and Articles of Association as per the doctrine of constructive notice

The Doctrine of Indoor Management

The doctrine of indoor management is the limitation of the doctrine of constructive notice. It is quite the opposite of constructive notice as it protects the rights of a third party, while constructive notice protects the rights of the company from outsiders. The doctrine of indoor management thus says that if any outsiders believe that the company will conduct an act within its authority, and if they fail to do so, then that irregularity will not affect the outsider as it is an internal matter of the management of the company.

Anyone who is dealing with the company is bound to read the registered documents. They must see that the proposed dealing is not inconsistent with the memorandum and the Articles of the company. This doctrine allows the outsiders who are dealing with the company to assume that, as far as the internal proceedings of the company are concerned, everything has been properly done by the company. However, the outsiders need not enquire into the irregularities of internal proceedings as required by the memorandum and the articles. This doctrine is based on public convenience and justice.

The 'Turquand Rule'

The doctrine of indoor management is also known as the Turquand rule, as it is founded in the case Royal British Bank v. Turquand, (1856) 6 E&B 327. In this case, the bank lent money to the company on a bond, which requires a resolution passed in a general meeting. The director of the company acquired the loan but did not pass the resolution. The Articles of the company had empowered to issue such bonds, provided they were authorized by a resolution passed by the shareholders at a general meeting of the company.

On default of repayment of the money, the bank sued the managing director of the company for the amount due on the bond. The company claimed that the resolution authorizing the directors to issue the bond had not been passed, and thus the bond was issued without any authority. The court held in the case that outsiders only knew about the company's external position but not the company's internal matters. The company’s indoor affairs are the problem of the company, not of the outsider. Thus the bank was allowed to recover the amount of the bond from the company on the ground that the bank was entitled to assume that the required resolution had been passed.

Exceptions to the Doctrine of Indoor Management

• Knowledge of irregularities:

Knowledge of irregularities is the first exception to the Turquand rule. The rule has no application where the party affected by an irregularity had actual notice about it.

Howard v. Patent Ivory Manufacturing Co., (1888) 38 Ch. D. 156

As per the articles of the company, the directors could borrow only 1000 pounds without the approval of the shareholders in the general meeting. For borrowing any amount beyond that, the directors had to obtain the concern of the shareholders. Howard was a director of the company and he lent to the company an amount of 2000 pounds without the consent of the shareholders. The court held that he had notice of the internal irregularity. And hence, the company was only liable to pay £1000.

• Negligence:

If any person is suspicious of the condition of the company that affects the contract, then they should inquire about it. If they neglect to inquire, then they cannot depend on this rule.

Anand Bihari Lal v. Dinshaw and Co., (1946) 48 BOMLR 293

In this case, the plaintiff got the company property transferred from its accountant. This transfer was held void as the plaintiff had to obtain a copy of the power of attorney and check whether the accountant had the authority to transfer company property or not.

• Forgery:

Forgery is an exception to the Turquand rule, as forgery is invalid and does not require any consent. The protection of indoor management will not be available in the case of forgery committed by the company's officials.

Ruben v. Great Fingall Consolidated, [1906] 1 AC 439

In this case, the plaintiff was the transferee of a certificate that was issued under the seal of the defendant company. The secretary of the company affixed the seal of the company and forged the signatures of two directors, which was needed for a substantial certificate. The plaintiff pleaded that the signatures, whether genuine or forged, were an internal matter of the company, and they should not deny the authenticity of the certificate. However, it was held that the company was not liable for the fraud done by their secretary, and the certificates were held invalid.

• Acts outside apparent authority/ Ultra Vires acts:

If a person acts beyond his or her extent of authority, he or she cannot claim protection under the rule that the article permitted or authorized the delegated power to do the act.

Anand Bihari Lal v. Dinshaw and Co., (1946) 48 BOMLR 293

In this case, the plaintiff accepted the transfer of company property from its accountant, which was beyond the authority of the accountant and held void. Even delegated power of authority cannot validate it.

• Representation through Articles/ Lack of Knowledge of Articles:

This exception is the most controversial part of the Turquand Rule. Articles contain the power of delegation. An outsider is deemed to have constructive notice of information that would become apparent through a reasonable investigation or inspection, and the indoor management rule could not be applicable in this case.

Lakshmi Ratan Cotton Mills v. J.K. Jute Mill Co., (AIR 1957 All 311)

This case explains the instance of delegation. One 'G' was a director of the company. The company also had many managing agents. G was also the director of these managing agents. As per the Articles of Association of the company, the directors were empowered to borrow money and they can further delegate this power to any one of the managing agents as well. Director G borrowed a sum of money from the plaintiffs. When the dispute arose, the company argued that there was no board resolution passed, that delegated G the power to borrow money. However, the court held that the company is bound to repay the loan, as it was mentioned in the Articles of Association. The actual delegation of power is a matter of the company's internal affairs and the plaintiff was not bound to look into that.

Difference Between the two Doctrines

The doctrine of constructive notice imposes a duty upon those who are dealing with the company to be aware of the public documents of the company. This doctrine tries to protect the company against outsiders. The doctrine of indoor management, on the other hand, allows those who are dealing with the company to dispense with the knowledge of what is taking place within the doors that are closed to them. They are not bound to look whether the internal affairs of the company a performed well. They can assume that the company's internal regulations, which are necessary to implement a contract, have been complied with by the officials of the company. Thus, the doctrine of indoor management seeks to protect outsiders against the company.

References

• G.K. Kapoor and Sanjay Dhamija, Company Law & Practice, Taxmann, (26th ed., Sept. 2022).
• The doctrine of constructive notice https://www.wallcliffslawfirm.com/uploads/newsletter-files/2020072917001849290-LA_-_July_2020_-__Issue_01.pdf
• The Doctrine of Indore Management http://eportal.silverlaw.in/Files/327_97743DoctrineofIndoorManagementpdf.pdf
• Exception of indoor managementhttps://www.scribd.com/document/66630856/Doctrine-of-Indoor-Management

Disclaimer: The author affirms that this article is an entirely original work, never before submitted for publication at any journal, blog, or other publication avenue. Any unintentional resemblance to previously published material is purely coincidental. This article is intended solely for academic and scholarly discussion. The author takes personal responsibility for any potential infringement of intellectual property rights belonging to any individuals, organizations, governments, or institutions.

About the Author: Priyanshi Lekhwar is a first-year BA.LL.B student at Vivekananda Institute of Professional Studies, Pitampura, New Delhi.