ACKNOWLEDGEMENT:-

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 CONTENTS:-

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 DOCTRINE OF INDOOR MANAGEMENT

According to this doctrine, persons dealing with the company need not inquire whether
internal proceedings relating to the contract are followed correctly, once they are satisfied
that the transaction is in accordance with the memorandum and articles of association.

Shareholders, for example, need not enquire whether the necessary meeting was convened
and held properly or whether necessary resolution was passed properly. They are entitled to
take it for granted that the company had gone through all these proceedings in a regular
manner.

The doctrine helps protect external members from the company and states that the people are
entitled to presume that internal proceedings are as per documents submitted with the
Registrar of Companies.

The doctrine of indoor management evolved around 150 years ago in the context of the
doctrine of constructive notice. The role of doctrine of indoor management is opposed to of
the role of doctrine of constructive notice.

Whereas the doctrine of constructive notice protects a company against outsiders, the
doctrine of indoor management protects outsiders against the actions of a company. This
doctrine also is a possible safeguard against the possibility of abusing the doctrine of
constructive notice.

For understanding the doctrine of indoor / internal management, the understanding of the
concept of doctrine of constructive notice is sine qua non. So a brief introduction of this
concept is given here.

THE DOCTRINE OF CONSTRUCTIVE NOTICE (THE GENERAL RULE):-

Memorandum and articles of associations of a company are necessary to be registered with
the Registrar and once registered both these become public documents and are accessible to
all the persons. It is therefore duty of every person dealing with a company to inspect its
public documents and make sure that his contract is in conformity with their provisions. It is
immaterial whether that person actually read and understood the said documents or not. This
duty of reading and understanding the said provisions of the Memorandum and Articles of the
company is presumed and construed to have been performed. This presumption or
construction is considered to be Constructive Notice. Case Law Oakbank Oil Co. V. Crum
1
“the person dealing with the company is taken not only to have read those documents but to
have understood them according to their proper meaning.” Ridley V. Plymouth Grinding and
baking Co.2 “The person is presumed to have understood not merely the company’s powers
but also those of tit’s officers.”

PURPOSE OF THE CONSTRUCTIVE NOTICE DOCTINE:- This doctrine is the outcome

of the need to secure the company form the outsiders when they look to deceive the company
1
(1882) 8 AC 65,71
2
(1848) 2 Exch 711

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by alleging their unawareness with the contents of the memorandum and articles and trying to
evade their contractual liabilities or accusing the company of fraud, as the case may be.

DOCTRINE OF INDOOR MANAGEMENT:- An exception to the constructive notice

doctrine is the “doctrine of indoor management”, as the former protects the company form
outside stakeholders the later protects the outside stakeholders against the company.3
Though once registered the memorandum and articles become public documents and the
person dealing with the company must have a notice of these documents, however, this rule
of constructive notice is confined to the external positioning of the company and it is easily
understandable that,” the person will have no notice as to how the company’s internal
machinery is handled by its officers.Thus, the person dealing with the company will not be
prejudiced even when the transaction is inconsistent with the public documents if the
irregularities which render the transaction invalid, relate to the indoor working of the
company. This doctrine is commonly known as the TURQUAND RULE, for it traces its
origin in case Royal British Bank V Turquand4 where:- “The company’s articles provided
that the directors might borrow on bond such sums as may from time to time be authorized by
a resolution passed at a general meeting of the company. The directors did borrow a sum of
money from the plaintiff. The shareholders claimed that there had been no such resolution
authorizing the loan and therefore it was taken without their authority. However, it was held
that the company was bound by the loan. The court said that person dealing with a company
is entitled to assume, in the absence of facts putting him on inquiry, that there has been due
compliance with all matters of internal management and procedure required by the articles.”
So, the person dealing with the company is bound to know what he can know as a public
person but, not what is not in his reach and which is done behind the doors of the company
where he cannot access to.

PURPOSE OF THIS DOCTRINE:- The business is a field which requires the protection of
all the contracting parties and good business can only make sure the good development of the
economy and commerce. Though, apparently this doctrine is for the protection of the persons
dealing with the company but it’s more important purpose it to promote the investments in
business in order to keep the business and the economy going well. As Justice Bray said in
Dey v. PullingerEngg Co. (1921) 1 KB 77:- “The wheels of commerce would not go around
smoothly if persons dealing with companies were compelled to investigate thoroughly the
internal machinery of a company to see if something is not wrong.” Also Lord Simonds said
in Morris v. Kanssen (1946) 1 ALL ER 586,592:-

“The people in business would be shy in dealing with the companies if they have to check
completely the internal working of the companies.” The investors until and unless they are
secured in all respects never show any tendency to invest money and without investments the
business and simultaneously the economy is always affected badly. The protection given to
the investors under this doctrine is a step to promote the business and the growth of
commerce.

EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT:- The doctrine of

indoor management is not unexceptionable in all the circumstance, rather, there are certain
circumstances where this doctrine cannot and should not be applied. Like the establishment
of the doctrine, these exceptions are also judicially established, which are as follows:- 1-

3
Dr. G.K. Kapoor, Taxman’s Company Law and Practice 22 nd ed. 2017
4
(1856)119 ER 886

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Knowledge of Irregularity The doctrine of indoor management can be no defense where the
person dealing had the knowledge of the irregularity. This is the first and foremost restriction
on the application of this doctrine. Meaning thereby that the presumption of irregularity can
not be relied upon by the “insiders” ie the persons who by virtue of there position in the
company are in position to know whether or not internal regulation has been observed. The
application of the doctrine of indoor management was refused on the ground that the person
dealing with the company had the knowledge of the irregularity in Howard V.Patent Ivory
Manufacturing Company, (1888) 38 Ch. D. 1561 and the directors were not allowed to
defend the issue of debentures to themselves because they should have known that the extent
to which they were lending money to the company required the assent of the general meeting
they had not acquired. Similarly in Morris V. Kanssen (1946) 38 A.C 459 a director could not
defend an allotment of shares to him as he participated the meeting which made allotment.
His appointment was also fell through because none of the directors appointing him was
validly in office. 2-SUSPICION OF IRREGULARITY As the words “in the absence of
circumstances putting him on inquiry “were used in the Turquand case, so the advantages of
this doctrine are not available to the person who had suspicion of irregularity as in this case
he is obligated to satisfy himself of the legality of the transaction and all matters relating to it.
As in AnandBihariLal V. Dinshaw& Co, Air 1942 Oudh 417 the plaintiff accepted the
transfer of company’s property from its accountant. The transfer was held to be void. The
plaintiff could not have supposed, in the absence of power of attorney, that the accountant
held power to transfer company’s property. 3-FORGERY:-Turquand’s rule does not to apply
to forgery. It was clearly said in Ruben v. Great Fingall Consolidated (1906) AC 439 that it is
quite true that persons dealing with limited liability companies are not bound to inquire into
their indoor management and will not be affected by irregularities of which they have no
notice, but it cannot apply to a forgery. In this case the plaintiff was the transferee of a share
certificate issued the defendant company. But this was issued by company secretary who
affixed the seal of company and froged the signature of two of the directors. 4-
REPRESENTATAION THROUGH ARTICLES The Articles of association generally
contain what is called the “power of delegation” In order to claim protection under this rule
and under this kind of exception knowledge of Memorandum and Articles of Association is
essential. A person who did not consult or act according to its provisions cannot be protected.
This concept is applied in different cases differently by the courts; In Lakshmi Rattan lal
Cotton Mills v. J K Jute Mills Co, AIR 1957 All 311 “the company was held liable to a loan
taken by the managing agent because the articles provided for the delegation of borrowing
powers to the managing agent and it was said that the “delegation clause” was there in the
articles and the person dealing with the company could assume that powers have been
delegated.” But what if the person had not consulted the articles of the company and had no
knowledge of the contents of the articles? This question was answered in Houghton & Co v.
Nothard Lowe and Wills Ltd, (1927) 1 KB 246. In this case as well there was a delegation
clause in the articles and contract was entered into by a person (a director) who could claim
the delegation of the powers to him, but the plaintiff company had not read the articles of
association and had no knowledge of the delegation clause and hence it was held that the
plaintiff company cannot claim the advantage of the clause of articles which he had no
knowledge of at the date of entering into the contract. While in Ford Motor Credit Co Ltd V.
Harnack (1972) the presumption of the ostensible authority was held to be a valid ground for
binding the company.”

This exception of the “Turquand rule “is the one which can very easily be invoked. It is very
clear that if the act of the officer of the company is such as is apparently out of his power it
should not be relied upon and if relied upon the company cannot be held to be bound by the

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act. A very clear description of this rule was given in AnandBehariLal v. Dinshaw and Co.
AIR 1942 Oudh 417 where “the plaintiff accepted the transfer of company’s property by an
accountant of the company which was apparently beyond the powers of an accountant and
company was held not to be bound. CONCLUSION Companies enter into several kinds of
contracts and transactions with different persons. The laws regulating the companies have
never been able to cover each and every aspect of the companies workings and the judiciary
has always helped through precedents, examples of this help by the courts of law are the
creation of the “Doctrine of Constructive Notice” and the “Doctrine of Indoor management.”
The former one is for the protection of the companies from outside stakeholders and has
always been very helpful for the companies while as the interests of the investors are also
necessary to be protected the “doctrine of indoor management “ was introduced. These two
doctrines act to balance the protection of company as well as outside stakeholders.

EXCEPTIONS TO DOCTRINE OF INDOOR MANAGEMENT

Knowledge of irregularity: In case this ‘outsider’ has actual knowledge of irregularity

within the company, the benefit under the rule of indoor management would no longer be
available. In fact, he/she may well be considered part of the irregularity.

Negligence: If, with a minimum of effort, the irregularities within a company could be
discovered, the benefit of the rule of indoor management would not apply. The protection of
the rule is also not available where the circumstances surrounding the contract are so
suspicious as to invite inquiry, and the outsider dealing with the company does not make
proper inquiry.

Forgery: The rule does not apply where a person relies upon a document that turns out to be
forged since nothing can validate forgery. A company can never be held bound for forgeries
committed by its officers.5

5
Avtar Singh, Company Law 15thed., 2009

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 CONSTRUCTIVE NOTICE
Constructive notice is the legal fiction that signifies that a person or entity should have
known, as a reasonable person would have, of a legal action taken or to be taken, even if they
have no actual knowledge of it.

The doctrine is generally construed with regards to legal notices published, either by posting
them at a designated place in a courthouse, or publishing them in a newspaper designated for
legal notices. Because both methods of publication are available to the general public
(courthouses being open to all members of the general public, and newspapers readily
available in public places such as libraries), the person to whom the notice is being issued
(even if issued in a generic form, such as "To All Heirs of John Smith, a Resident of Orange
County") is considered to have received notice even if they were not actually aware of it.

Another use of constructive notice is in the recording of deeds, mortgages, liens, and similar
documents in county registries in the United States. Since such documents are considered
public information and can be accessed by any member of the public, such recordings are
considered constructive notice of land conveyances or encumbrances having taken place.

In companies law the doctrine of constructive notice is a doctrine where all persons dealing
with a company are deemed (or "construed") to have knowledge of the company's articles of
association and memorandum of association. The doctrine of indoor management is an
exception to this rule.

The New York City Housing Court allows use of the concept of constructive notice by either
the tenant or the landlord. For example, constructive notice could be given to a landlord if a
broken and unsupported metal grate on a public sidewalk collapses when stepped on by a
pedestrian. The landlord is reasonably expected to know that this is a safety hazard6.

EFFECT OF THE DOCTRINE OF CONSTRUCTIVE LIABILITY

The effect of the doctrine of constructive liability is harsh on the other party. It is, therefore,
the duty of every person dealing with a company to inspect its public documents and make
sure that his contract is in conformity with their provisions. The Madras High Court
discussed the scope of the rule of constructive liability in kotlaVenkataswamy v. Rammurthy7
The dispute in this case was whether the mortgage bond was validly executed as per the
company’s articles of association so as to make the company liable. Article 15, of the
Company’s Articles of Association provides that all deeds, hundies, cheques, certificates and
other instruments hall be signed by the Managing director, the Secretary and the working

6
Teacher, Law. (November 2013). Doctrine of Constructive Notice. Retrieved from
https://www.lawteacher.net/free-law-essays/business-law/doctrine-of-constructive-notice-business-law-
essay.php?vref=1
7
AIR 1934 Mad 579

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Director on behalf of the Company, and shall be considered valid. In the instant case, the
plaintiff accepted a deed of mortgage executed by the secretary and a working director only.
The court held that the plaintiff could not claim under this deed. The Court further observed
that if the plaintiff had consulted the articles she would have discovered that a deed such as
she took required execution by three specified officers of the company and she would have
refrained from accepting a deed inadequately signed. Notwithstanding, therefore, she may
have acted in good faith and her money may have been applied to the purposes of the
company, the bond is nevertheless invalid.

One of the effects of the rule of constructive liability is that a person dealing with the
company is considered not only to have read those documents but to have understood them
according to their proper meaning. He is presumed to have understood not merely the
company’s powers but also those of its officers.

In Re Jon Beauforte (London) Ltd8 case , where the insolvent company’s stated objects were
to manufacture dresses but it had for sometime instead been making veneered panels, a
combination of actual knowledge of the business being carried on by the company and of
constructive notice of its stated objects resulted in all but one of its creditors’ claim being
ultra vires. The court said that the result of this rule of constructive notice was that where the
business being carried on by the company were known to the third party and, whether he
actually knew it or not, were ultra vires, he would be unable to sue the company.

In case of ultra vires acts of the company the other party cannot claim relief on the ground
that he was unaware of the powers of the company. The rules of common law established
over the years have already provided extensive protection for persons dealing with a
company in good faith where the act or transaction concerning or involving such persons is
not ultra vires and beyond the company’s powers. The Court in Royal British Bank v.
Turquand established a principal to provide the protection to other party who is dealing with
a company. According to the rule propounded in this case, although those dealing with a
company were deemed to have notice of the contents of memorandum and articles, they were
not required to satisfy themselves that all the internal regulations se out therein had been
complied with. This, however, was no help when the transaction was beyond the company’s.

STATUTORY REFORM OF CONSTRUCTIVE NOTICE

Section 9 of the European Communities Act, 1972 has abrogated the doctrine of constructive
notice. The provision of Section 9 is now incorporated in Section 35 of the Companies Act,
1985. Additionally the Companies Act, 1989 introduced two further sections into the 1985
Act to deal with the constructive notice. Section 35B of the Companies Act satted:

“A party to a transaction with the company is not bound to enquire as to whether it is

permitted by the company’s memorandum or as to any limitation on the powers of the board
of directors to bind the company or authorize others to do so.”

8
[1953] 1 Ch. 131

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This was supposed to be introduced by Companies Act, 1985, S.711A which was to abolish
the concept of constructive notice for corporations. However, S.711A has never been
implemented and so only section 35 B dealt with constructive notice.

An example of the impact of this provision was seen in the case of TCB Limited v.
Gray,where the debenture issued by the company was signed by solicitor but not by the
director himself. The articles of the company required the signature of the director for this
purpose. Even so, the company was held liable. Stating the effect of the new provision, the
Court said that before this enactment came into force a person dealing with the company was
required to look into the memorandum and articles of the company to satisfy himself that the
transaction was within the corporate capacity but that section 9(1) had changed this. The sub-
section says that good faith is to be presumed and that the person dealing with the company is
not bound enquire .

INDOOR MANAGEMENT: AN ANTITHESIS TO CONSTRUCTIVE

NOTICE PRINCIPLE.

The foundation of the rule of indoor management was laid down in the case of Royal British
Bank v Turquandand the doctrine of ‘indoor management’ evolved as a partial exception to
the doctrine of ‘constructive notice’.

In this case, the directors of a company borrowed money by issuing a bond. As per the
articles of association of the company, they were authorized to do so subject to a special
resolution in that behalf. But no such resolution was passed by the company. The court held
that the company would still be liable to pay off the debts incurred, and the bank was entitled
to assume that before borrowing money, the resolution was passed.

Professor Gower, summarizing the doctrine stated, “If the directors have the power and
authority to bind the company but certain preliminaries are required to be gone through on
the part of the company before that power can be duly exercised, and then the person
contracting with the directors is not bound to see that all these preliminaries have been
observed. He is entitled to presume that the directors are acting lawfully in what they do.

The doctrine of indoor management is based on the policy of public convenience and justice.
The reason as to why such doctrine is needed is that the internal procedure, which happens
within the company, is not a matter of public knowledge. Therefore, though any outsider is
presumed to be aware of the documents which are publically accessible, but not of the
internal proceedings of which he cannot be reasonably aware of because those are not
accessible to the public9.

Thus, the doctrine of constructive notice and indoor management go hand in hand. On one
hand, the doctrine of constructive notice protects the company from the outsiders; on the
other hand, the principal of indoor management offers protection to the outsiders while
dealing with the affairs of the company. The doctrine of constructive notice comes into
picture when an outsider fails to inquire about the company. However, the doctrine of indoor

9
https://www.law.cornell.edu/wex/constructive_notice

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management can be invoked by any outsider dealing with the company and cannot be
invoked by the company10.

CONCLUSION
The doctrine of constructive notice doctrine expects each and every outsider not only to
know the documents of the company but also presumes to understand the exact nature of
documents, which is practically not possible, and thus, in my opinion, is a little unfavourable
to the outsiders dealing with the company. However, in reality, the company is not known by
the documents but by the people who represent it and deal with an outsider. Those who
enter into contracts with the company usually do so, on the basis of goodwill and reputation
of the persons representing the company rather than the documents of the company.

Hence, the courts have evolved the doctrine of indoor management as an opposite to the
doctrine of constructive notice in order to protect the interests of the outsiders. In my opinion,
the doctrine of indoor management is absolutely necessary for protecting the outsiders and
forcing the company to fulfill their part of obligation in genuine transactions. This also needs
to be implemented subject to certain exceptions and the same have been evolved by the
courts.

BIBLIOGRAPHY

- https://blog. Ipleaders.in.
- https://www.toppr.com
- www.legalserviceindia.com
- https://www.scribd.com

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http://www.legalserviceindia.com/legal/article-136-doctrine-of-constructive-notice-and-doctrine-of-indoor-
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