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PROJECT REPORT

COMPANY LAW

DOCTRINE OF CONSTRUCTIVE NOTICE

&

INDOOR MANAGEMENT

SUBMITTED TO: SUBMITTED BY:

MS. ALAMDEEP ANSHUL RANA

272/15

B.COM. LLB (8th Sem)

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ACKNOWLEDGEMENT

I am using this opportunity to express my gratitude to everyone who supported me throughout

the course of this project. I am thankful for their aspiring guidance, invaluably constructive
criticism and friendly advice during the project work. I am sincerely grateful to them for sharing
their truthful and illuminating views on a number of issues related to this project.

I express my heartfelt thanks to Ms. Alamdeep for her support and guidance and for being a
guiding light throughout.

I would also like to thank all the people who provided me with the facilities and conducive
environment for the completion of this project.

ANSHUL RANA
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INTRODUCTION
Section 2 (20) of Companies Act, 2013 Company means a company incorporated under this Act
or under any previous company law.

The word company has no strictly technical or legal meaning. A body corporate or corporation
includes a company incorporated outside India, but does not include a co-operative society
registered under the law relating to co-operative societies, and anybody corporate which the
Central Government may, by notification, specify for this purpose. Company is derived from two
words: com- group and companies- bread. Therefore, it means group that eat their bread
together.

The company is given the status of an artificial person. The memorandum and articles of
association, of a company, contemplates the documents, which sets out the objects and powers of
a company. These documents are accessible to the people either without any costs or on payment
of a nominal amount. Therefore, any person who enters into a contract with the company is thus
presumed to have inspected such documents and thus to be aware of the powers that are being
delegated to the directors.

The memorandum and articles when registered with Registrar of Companies becomes public
document and then they can be inspected by anyone on payment of a nominal fee. Therefore, any
person who contemplates entering into a contract with the company has the means of
ascertaining and is thus presumed to know the powers of the company and the extent to which
they have been delegated to the directors. In other words, every person dealing with the company
is presumed to have read these documents and understood them in their true perspective. This is
known as doctrine of constructive notice.

The memorandum of association and articles of association are two most important documents
needed for registration and incorporation of a company. The memorandum of association of a
company contains the fundamental conditions upon which alone the company has been
incorporated. According to Section 2(28) of the Companies Act, 1956 defines the Memorandum
- it means the memorandum of association of a company as originally framed or as altered from
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time to time in pursuance of any previous company’s law or of this Act. According to Palmer,
the memorandum of association is a document of great importance in relation to the proposed
company. It contains the objects for which the company is formed and therefore identifies the
possible scope of its operation scope of its operation beyond which its action cannot go.

The Articles of association of a company are its bye-laws or rules and regulations that govern the
management of its internal affairs and the conduct of its business. According to section 2(2) of
the Companies Act, 1956 ‘Articles’ means the articles of association of a company as originally
framed or as altered from time to time in pursuance of any previous companies laws or of the
present Act.

Both memorandum of association and the articles of association are public documents according
to section 610 of the Act. These documents become public documents as soon as they get
registered and can be accessible by any members of the public under the provision of the Act.
Therefore, notice about the contents of memorandum and articles is said to be within the
knowledge of both members and non-members of the company. Such notice is a deemed notice
in case of a members and a constructive notice in case of non-members.

The effect of the doctrine of constructive notice is harsh on the outsider who does business with
a company. An outsider who dealt with a company is deemed to have a constructive notice of the
contents of the documents of the company. An outsider cannot claim relief on the ground that he
was unaware of the powers of the company in case of ultra vires of the company.

The ‘doctrine of constructive notice’ is more or less an unreal doctrine. It does not take notice of
the realities of business life. People know a company through its officers and not through its
documents.

In the case of Oakbank Oil Co. v. Crum1-

It has been held that anyone dealing with the Company is presumed not only to have read the
memorandum and Articles, but understood them properly.

1
(1882 8 A.C.65)
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-Thus, Memorandum and Articles of a company are presumed to be notice to the public.

-Such a notice is called Constructive notice.

CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES OF ASSOCIATION

The memorandum and articles of association of every company are registered with the Registrar
of the Companies. The office of the Registrar is a public office and consequently the
memorandum and articles become public documents. They are open and accessible to all. It is,
therefore, the duty of every person dealing with the company to inspect its public documents and
make sure that his contract is in conformity with their provisions. But whether a person actually
reads them or not, “he is to be in same position as if he had read them”. He will be presumed to
know the contents of those documents. This kind of presumed notice is called constructive
notice.

The effect of this rule is that a person dealing with the company is taken 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. Further, there
is constructive notice not merely of the memorandum and articles, but also of all the documents,
which are required by the Act to be registered with the Registrar. According to Palmer, the
principle applies to documents which affect the powers of the company. One of the suggested
approaches is that all documents which are open to public inspection should be regarded as
public documents. This is in keeping with the disclosure philosophy of company law and things
which are required to be disclosed in a public office, should have public effects and should be
usable as instruments of public accountability. In reference to the document containing
“particulars of directors” it has been held that it becomes a “public document”. Persons dealing
with the company would be deemed to have constructive notice as to who are the directors of the
company.

Legal effect: If a person’s deals with a company in a manner which is inconsistent with the
provisions contained in MOA and AOA – own risk and cost and shall have to bear the
consequences thereof.
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EFFECTS:

The effect of the doctrine of constructive notice may be summed up as follows:

1. ULTRA VIRES ACTS. – According to doctrine of constructive notice, every person dealing
with the company is presumed to have the knowledge of the contents of the memorandum
and therefore if an act is ultra vires the company, he cannot claim relief on the ground that he
was unaware of the fact that the act is beyond the memorandum (i.e., ultra vires the
company). In India, the outsider dealing with the company is presumed to have the
knowledge of the contents of the memorandum and therefore if an act is found to be ultra
vires, he cannot claim relief on the ground that he had no knowledge that the act was beyond
memorandum, and therefore, ultra vires.
2. ACTS BEYOND THE AUTHORITY OF DIRECTORS – If there is lack of authority of the
directors or other agents of the company, it is evident from the public documents like articles
and other regulations, the person dealing with the company will be presumed to have the
notice of the lack of authority and therefore he cannot hold company bound by the act of the
directors or other agents. For example, if the articles require a bill to be signed by two
directors, a person dealing with the company is under the duty to see that it has been signed
by the two directors; otherwise he cannot enforce the bill against the company. But if the lack
of authority of the directors or agents is not evident from the public documents, he cannot be
presumed to have the notice of the lack of the authority and therefore he can held company
bound by the act of the directors or other agents if he honestly thinks that the director or the
agent with who he is negotiating is authorized to act on the behalf of the company. For
example, where the articles require the directors to take the consent of the shareholders by
ordinary resolution for exercising thereof the borrowing powers but they borrow money
without taking such consent, the borrowing will be binding on the company if the creditor
has no notice of the fact that the directors negotiating with him have not taken such consent.
3. INCONSISTENT AGREEMENTS. – Person dealing with the company is presumed to have
the notice of the contents of the articles and consequently he cannot make a contract with the
company which purports to override any rights created by the articles.

The doctrine of constructive notice protects the company but not the outsider dealing with the
company. Sometimes the doctrine creates much hardship for the outsiders. They are presumed to
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have the knowledge of the public documents like the memorandum of the company but in
practice it is very difficult and time taking to have the complete knowledge of them before
making any contract with the company. Thus, the doctrine is inconvenient and unreal. It has
failed to take the realities of business life. On account of its evil the doctrine has not been taken
seriously both in India and UK. In England, the doctrine has been abrogated by the Europeans
Communities Act, 1997.

DOCTRINE OF INDOOR MANAGEMENT

“Indoor Management” restricts the operation of “constructive notice” to the public documents of
the company. The role of the doctrine of indoor management is opposed to that of the rule of
constructive notice. Accordingly, a person dealing with the company is bound to read only the
public documents. If his contract is consistent with them, the company is bound. He will not be
affected by any irregularity in the internal management of the company.

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 foundation of the rule was laid down in the case of Royal British Bank v. Turquand2
Turquand, a company, had a clause in its constitution that allowed the company to borrow
money once it had been approved and passed by resolution (decision) of the shareholders at a

2
[1843-1860] All ER 435 5
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general meeting. Turquand entered into a loan with the Royal British Bank and two of the co-
directors signed and attached the company seal to the loan agreement. Loan had not been
approved by the shareholders. Company defaulted on their payments and the bank sought
restitution. Company refused to repay claiming that the directors had no right to enter into such
an arrangement. It was held that – the Turquand was entitled to assume that the resolution was
passed. The Company was therefore bound by the rule. Doctrine is also popularly known as the
Turquand rule’.

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 public.

The rule is based upon obvious reasons of convenience in business relations. The memorandum
and articles of association are public documents. But the details of internal procedure are not thus
open to public inspection. Hence, an outsider “is presumed to know the constitution of a
company; but not what may or may not have taken place within the doors that are closed to him.”

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

EXCEPTIONS TO THE RULE

The doctrine of indoor management has been used for almost a century now. Since in the modern
world, the companies extended their roles to various social and political spheres, therefore the
scope of this doctrine was widened. Since the scope was widened, the chances of its misuse also
increased, so the courts came up with following exceptions to this rule:
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1. 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.
This exception covers situations where the person dealing with a company is aware of the
irregularities which are present in internal management. Such knowledge can be either by
actual or constructive notice, and the person thus cannot claim the benefit under the rule of
indoor management. This exemption can be better understood, by considering the case of T.R.
Pratt (Bombay) Ltd. v. E.D. Sassoon & Co. Ltd3., wherein one company lent some money to
another company on a mortgage of its assets. However, the procedure which was necessary to
comply before such transaction, was not complied with. The directors of the two companies
were the same. The court thus held that since the lender had notice of the irregularity, the
doctrine could not be invoked and hence the mortgage was not binding. The transfer was
approved by two directors, and the transferor was aware of the fact that one of the directors was
not validly appointed, and the other was disqualified being the transferee himself. Hence, the
court held that the transfer was ineffective
2. 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. The
person cannot invoke this doctrine if the person, who is entering into a contract with the
company, has not enquired prudently and has not made proper inquiries, because of which he is
not aware of the irregularity. If he would have conducted proper inquiries, then would have
known that irregularity exists, and hence it is because of his own fault that he is unaware of the
irregularity. This exception also covers the situation where the situations surrounding the
contract were so suspicious that a prudent person would have made an inquiry, but the
concerned person has not done so and hence is not entitled to claim the benefit of the doctrine.
This exception could be better understood while referring to the case of Anand Bihari
Lal v. Dinshaw & Co4. In this case, the plaintiff accepted a transfer of a company’s property
from its accountant. The court held that the transaction entered by the accountant was clearly

3
AIR 1936 Bom 62
4
(1946) 48 BOMLR 293
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beyond the scope of his authority, and hence the transfer was void. The plaintiff was reasonably
expected to see the power of attorney executed in favour of the accountant before accepting
such transfer by the accountant on behalf of the company.
3. FORGERY: 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. The doctrine of internal management cannot be used to validate transactions
in which the person relies on a document which has been forged. The leading case on this
point is of Shri Kishan Rathi v. Mondal Brothers and Co. (P.) Ltd5. In this case, the
plaintiff was the transferee of a share certificate issued under the seal of the defendant
company. The certificate which was issued contained the seal of the company and forged
signatures of two directors, and such forgery was done by the company’s secretary. It was
being argued by the plaintiff that the matter regarding the genuineness of the signature is a
part of internal management, and thus, such forgery of the signature cannot be contended by
the company. But the court held that the doctrine of indoor management cannot be extended
to validate and cover forgery cases. The court also said that this doctrine applies to
irregularities which might affect a genuine transaction and not to forgery.
4. REPRESENTATION THROUGH ARTICLES: This exception deals with the most
controversial and highly confusing aspect of the doctrine of indoor management. Articles of
association generally contains what is called the “power of delegation”. The case in which
the meaning and effect of a delegation clause has been explained is the case of Lakshmi
Ratan Cotton Mills v. J.K. Jute Mills Co6,. One G was a director of a company. The
company had managing agents of which also G was a director. The article of association,
empowered the directors to borrow money and to further delegate this power to any of them.
G borrowed a sum of money from the plaintiffs. The company argued that since there was no
resolution of the board delegating the power to borrow to G, he was not authorized to borrow
money and hence refused to be bound by the loan. But the court held that the company is
bound to repay the loan.

5
AIR 1967 Cal 75
6
AIR 1957 All 311
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Thus it can be said that the effect of a delegation clause is that a person who enters into a
contract with an individual director of a company, with the knowledge that the board has power
to delegate its authority to such an individual, he may assume that the power of delegation has
been exercised, and thus can claim the benefit under this doctrine.

DIFFERENCE CHART OF DOCTRINE OF CONSTRUCTIVE NOTICE AND INDOOR

MANAGEMENT

DOCTRINE OF CONSTRUCTIVE DOCTRINE OF INDOOR

NOTICE MANAGEMENT

1. It protects the company against the outsider. It protects outsider against the company.
.

2. It is confined to the external position and It is confined to the internal position and
affairs of the company affairs of the company.

3. The memorandum and articles of association The internal affairs need not be registered.
of the company are public documents. They They are not open to public and third parties.
must be registered with the Registrar of
Companies. These are open to public and third
parties to access.

5. It operates as an estoppel against the It mitigates the effects of the “Doctrine of

outsider. Constrictive Notice”.

.
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6. It is based on negative concept. It is based on positive concept

CONCLUSION
The rule of constructive liability is an unrealistic doctrine. It 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 unfavorable 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.

This is the reason why the British Courts and Indian Courts have shifted its approach in dealing
with the cases relating to the outsider of the company. The Indian Courts have not given much
importance to this doctrine. The European Communities Act has also abrogated the concept of
constructive notice by bringing Section 9 of the Act which recognizes the concept of good faith
in business transaction. This provision is in the tune of the reality of the business transaction,
where the outsiders of the company enter into the various contracts not on the basis of the
documents of the company but on the good faith of the company.

This is the reason why 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.
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The researcher on the basis of the various commentaries on the subject and the cases decided by
the British Courts and Indian Courts is of view that merely registration of a company should not
constitute the notice of the documents submitted to the registrar. Also, an outsider should always
have the freedom to make some assumption which a reasonable person may infer into the
particular circumstances.
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BIBLIOGRAPHY
● Dr. R.K. Bangia, Company Law (Allahabad Law Agency 5th Edn. 2006)
● Avtar Singh, Company Law (Eastern Book Company, Seventeenth Edn. 2018)

WEBLIOGRAPHY

 http://www.legalserviceindia.com/legal/article-136-doctrine-of-constructive-notice-and-
doctrine-of-indoor-management-in-company-law.html
 http://cec.nic.in/wpresources/module/Commerce/II_Year/46/e-
con%20584%20transcript.pdf
 https://www.ijarnd.com/manuscripts/v3i3/V3I3-1152.pdf
 https://vakilsearch.com/advice/companies-act-doctrine-indoor-management/