Doctrine of Constructive Notice and Doctrine of Indoor Management

DOCTRINE OF CONSTRUCTIVE NOTICE AND DOCTRINE OF INDOOR MANAGMENT

Doctrine of Constructive Notice

The Articles and Memorandum of Association (MOA) of every company are registered with Registrar of Companies under the Ministry of Corporate Affairs which is a public office. The Registrar Office is a public office & as a result the memorandum and articles become ‘public documents’. The law provided under Section 399 of the Companies Act, 2013 which allows any person to inspect, take records or extracts from any documents or make reports of any document of any company which has been registered with the Registrar of Companies under the Ministry of Affair.

The section provides for a fee, on a payment of which, the right of this will be provided to the applicant. This right extends to the inspection of any public document of any of the company. The MOA and AOA of the company are public documents and available for scrutiny at all times. They are patulous and get-at-able to all. Therefore, the duty of every person dealing with a company has to inspect its public documents and ensure that his/her contract is in adherence to their provisions.

But, whether a person literally reads and understood them or not, he is to be in the same plight as if he had read and understood them as per the proper understandings of those documents. He postulate to have understood not only merely the company’s powers but also those of its officers. He will surmise to know the contents of those documents. There is a constructive notice not only of the memorandum and articles, but also of all the documents, such as special resolutions (under S. 117) and particulars of charges (under S. 77) which are indispensable by the act to be registered with the Registrar.

The common law of doctrine of constructive notice should apply to the form like return, record, report. To instil the form is a public document which holds particulars of directors who are the mind & strength of the company and as well as secretaries & managers who are credible for the day to day running of the company. It’s a document which affects the powers and agents of the company. Transparently, its view must be more than just to provide info. about the company’s directors, managers and secretaries.

It was held in the case Oakbank Oil Co. v. Crum is that, if anyone had dealing with the company is presumed to not only to have read the MOA and AOA, but also understood them properly in the same sense. So therefore, the articles and MOA of the company are surmise to be notice to the public & such a notice is called as ‘Constructive Notice’. After the registration of the Company the MOA & AOA becomes public documents. It was considered that everyone who had dealings with the company knows of these documents. Legal effect of this rule is that If a person deals with a company in a manner which is incompative with the provisions accommodated in MOA and AOA, they shall have to bear their own risk and cost and consequences themselves.

Consequences of Doctrine of Constructive Notice

The Doctrine of Constructive Notice has been established in the case Ernest v. Nicholls. In this case, House of Lords held for the first time that any person who had dealings with the company is esteemed to be aware with the contents of all the public documents of the Company. Further, it has been held by the House of Lords in the case Mahony v. East HolyFord Mining Co, where the rules of the partnership will apply, in the case of absence of the doctrine of constructive liability.

Kotla Venkataswamy v. Rammurthy , in this case, the plaintiff had accepted a mortgage deed carried out by the secretary who was only a working director of the Company. The AOA of the company specified that such a deed needs to be carried out by three specific officers of the company otherwise, it’ll not be valid. Thus, they were refused any protection by the application of this doctrine.

In another the case Re Jon Beauforte (London) Ltd, a liquidated company’s objectives were to manufacture dresses but the company was manufacturing veneered panels. The understanding of this development was with the creditors. Therefore, in the insolvency proceedings, their claim was not executed for being ultra-vires.

Doctrine of Indoor Management

The Doctrine of Indoor Management is opposite to the rule of Constructive Notice. The rule of constructive notice seeking the protection of the company against the outsider while, the rule of indoor management is operates towards the protection of outsiders from the company.

This rule shields the person in contracting with the company were in a situation when, the application of the doctrine of constructive notice is being reign against an innocent person (who had contracts with the company) advance a rule which is privy to the management of the company that is, not available in the public documents. Such a case, the company is not to be provides any protection and it must complete the agreement or it should have to face the consequences. Thus, this rule equalise the previous rule and assures that justice surpasses for the innocent contractor.

This doctrine is popularly known as Turquand’s Rule as it was resulted in the case of Royal Bank v. Turquand. In this case, the AOA of the company has permits its Directors to borrow any sum of money that is required after moving a special persistence in this regard in the general meeting of the company. The company borrowed the sum without the passing of the required persistence. Therefore, the company refused to repay the sum to the bank. The company brought a bond with the seal of the company signed by two directors and a secretary which was given to the bank as the authority letter to consummate the requirement. The company stated that the passing of the persistence is an internal matter and couldn’t have been inquired by the bank. It forwarded the loan when sufficient documents to prove the consent were to provide them. The Court of Exchequer Chamber ruled that the bond was binding on the Company. It was held that Turquand was entitled to presume that the required persistence on, must have been passed by the company because of the bond that was bestowed to them. Thus, Turquand was allowed to recover the payment.

The Doctrine of indoor management is clearly an exception to the rule of constructive notice. In other terms, it means that if any persons transacting any business with the company are entitled to assume that if there is any internal requirement prescribed in the public document, which it has been met by the officers. It vindicates any liability for any internal fluctuations of the company as it cannot be reasonably expected from an outsider to inquire about such details.

Impacts on Doctrine of Indoor Management

The Court has applied Turquand’s rule in Varkey Souriar v. Keraleeya Banking Co. Ltd., were that a person dealing with the company need not to inquire about the internal proceedings of the company in hastening of an responsibility put on them through a public document or otherwise. All is expected from them is to make sure that the person transacting the business has the permit or authority to do so.

In the case Lakshmi Ratan Cotton Mills Co. Ltd v. J.K. Jute Mills Co. Ltd, the plaintiff sued the defendant company for the non-payment of a loan of Rs.1.5 Lakhs which was taken through a letter accredited by the Board of Directors. The posture of the court was similar to the Turquand case as it was held that the company cannot be expected to be in wisdom of an internal rule of the debtor company. If mediations are happening on behalf of the company, it shall be assumed that all the internal requirements for the same have been met by the officers of the company. The only facet that a person needs to see whether a he is approaching on behalf of the company is an authorised person or not.

Exceptions to the Doctrine of Indoor Management

1. Knowledge of irregularity
2. Negligence / Suspicion of irregularity
3. Forgery
4. Representation through articles

Knowledge of irregularity:

The case when the affected party knew of the indelicacy already. It happens when the person contracting himself was a party to the inside protocols of the company. It was held in the case Howard v. Patent Ivory Manufacturing Co, that the directors could not safeguard the issue of debentures it’s because, being the directors, they should have been the extent to which they were lending the money and for that amount, the consent of the general meeting was necessary which was not breed in this case.

Negligence / Suspicion of irregularity:

In the case of Anand Behari Lal v. Dinshaw, the plaintiff has accepted a transfer of property of the company concluded by the accountant of the company. In ordinary discretion, no company allows its accountant to transfer the properties of the company. Thus, the plaintiff was asked to have more cautious and the defence was not provided to him.

Forgery:

Forgery maybe in some cases will become an exception to this rule. In the case Ruben v. Great Fingall Consolidated, where, the company secretary had sold the shares to the plaintiff by faking the signatures of two directors. It was held that the company can’t be made liable where there has been a vivid forgery and fraud.

Representation through articles:

The AOA of the company allow for committal of any power, the person transacting business with the company may presume that, the person be ostensibly to conclude the transaction must have been consign the said power. The issue regarding this arose in the case Rama Corporation v. Proved Tin and General Investment Co, where a director entered into an agreement on behalf of the company without any committal of power in that regards. It was found out that the person did not have the knowledge that there existed a power of committal. Thus, the advantage was not given to him. Although it was observed that if he had been well aware of the power of delegation, the assumption would have been in his favour.

CONCLUSION

The Common law had been laid down by the principle of turquand case in which later on terminated with into the Doctrine of Indoor Management which exists to alleviate the nimiety which might be caused by doctrine of constructive notice. The doctrine of constructive notice provides protection to the companies while they are dealing with the outsiders. The law fiction is created in favour of the company as this allows the plain process. Thereby, if an outsider is dealing with the company, it is a foremost duty of him to know all the rules of the company which are available in the public documents. This provision was seen to be doing more evil than good, thereby; its credibility was getting decreased. Thus, the Doctrine of Indoor Management has been expanded by the courts to constrain the application of this provision when the dispute is in internal. To conclude, that the view of this provision is essential, and has been assisting to bring justice to the people.

Author: Ugesh Rajan.J,
School of Excellence in Law, 2nd year, BCA.,LLB.,(Hons.)