RESEARCH PAPER ON

THE DOCTRINE OF CONSTRUCTIVE NOTICE & INDOOR MANAGEMENT

SEMESTER V

2020-21

TABLE OF CONTENTS
1
ABSTRACT…………………………………………………………………………………………………………………………………3

INTRODUCTION………………………………………………………………………………………………………………………..4

DOCTRINE OF CONSTRUCTIVE NOTICE……………………………………………………………………………………..4

Applicable rules: Companies (Registration Offices and Fees) rules, 2014……………………..5

CRITICAL ANALYSIS OF DOCTRINE OF CONSTRUCTIVE NOTICE AND EVOLUTION

OF DOCTRINE OF INDOOR MANAGEMENT……………………………………………………………………………….7

DOCTRINE OF INDOOR MANAGEMENT…………………………………………………………………………………….8

CONCLUSION…………………………………………………………………………………………………………………………….9

ABSTRACT:

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The laws in India have evolved over time and the Companies law is one of the greatest example
of the same. The Companies Act is landmark legislation. The section 610 of the Companies Act,
1956 states that the documents kept by Registrar of the companies can be inspected and be
produced as evidence. It provides that the memorandum and articles once registered become
public documents and then can be inspected by anyone. Therefore, any person who wishes to
enter into a contract with the company has the means of ascertaining the same and is thus
presumed to know the powers of the company and the extent to which they have been
delegated to the directors. Both memorandum of association and the articles of association are
public documents according to section 610 of the Act. The 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.
This paper aims at throwing light on the situation when the contents of the documents are
considered to be constructive notice and aims at explaining the legal foundation of such notice.
In this paper the author critically analyses the doctrine of constructive notice on the basis of
case laws and reasonable arguments and describes the evolution of doctrine of indoor
management. The paper is an attempt at explaining the complementary relationship of the two
doctrines and how they should be read together for clearer understanding.

Keyword: Memorandum of association (MOA), Articles of association (AOA), Doctrine of

constructive notice, Doctrine of Indoor management

INTRODUCTION:

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A company as defined in Companies Act, 2013 (hereinafter referred to as ‘The Act’) is a body
corporate registered under the act or any previous law and includes all companies, whether
public or private. A company is a public entity to an extent that some of its documents are
always available on the public domain, soon after it is registered.
A company is an association of individuals who come together with the intent to carry out
commercial activities to generate profits. The functioning of a company is governed by a set of
laws that are formulated with the intention to protect the company, its management as well as
the person who is engaging with the company. These laws prevent unfair practices and curb
fraud in the corporate world.
The doctrine of constructive notice and doctrine of indoor management are two important
principles devised on the same lines. The former being the rule and the latter being its
exception. The doctrine of constructive notice protects the interest of the company whereas
the doctrine of indoor management safeguards the interest of the outsider. These doctrines aim
at ensuring that no party gains unfairly out of the contractual relationship.

DOCTRINE OF CONSTRUCTIVE NOTICE:

The Doctrine of Constructive Notice was first propounded in 1850s in the English Law with
respect Deed of Settlement which stated that if a person is dealing with a company, it would be
deemed that such person has notice of that company’s registered documents. This means that
the knowledge of facts is deemed by the law which may or may not be present. Though there is
no strict definition of this doctrine in the companies’ law but this apparent presumption is
called the Doctrine of Constructive Notice.
The Memorandum of Association and the Articles of Association are the two registered
documents which every company has. These are registered with the Registrar of Companies
under the Ministry of Corporate Affairs, which is a public office. The two documents are the
constitution of the company and the company is governed by the laws mentioned in there. The
MOA and AOA are public documents, accessible to everyone and therefore, the law poses an
obligation on every person transacting with the company to be well-versant with the two
documents of the company. It is the duty of a person making a contract with a company that his
contract should conform to the AOA and MOA of the company. If not, the company cannot be
made to fulfill the contract and no remedy lies for the contracting party due to this legal
obligation put on him.
The party, under this doctrine cannot rebut even when there is sufficient evidence of absence of
knowledge and when the outsider party acts in good faith. It thereby becomes imperative to be
conversant with all the rules and regulations of the company which are available in the public
domain. The above definitions make it evident that a constructive notice is enough proof that
the person had the knowledge of the facts and the proof is conclusive in nature.
The Doctrine of constructive notice finds its legal foundation in Section 399 of The Companies
Act, 2013. The said section gives the right to inspect the documents of the company as well as
go through the records of the company available with the registrar. Since the MOA & AOA are
public documents, a person can only enter into a contract with the company after properly
going through such documents. The said section states that:

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 1. Any person can inspect the documents available with the registrar in accordance with
the rules made, by electronic means, on payment of prescribed fees. 1
2. A copy or extract of any document kept at any of the office of the registered company,
certified by the registrar (whose official position shall not be necessary to prove) would
be admissible in the court as of equal validity with the original document. 2

Applicable rules: Companies (Registration Offices and Fees) rules, 2014

Rule 14: The inspection of documents maintained in electronic registry that are set up in
pursuance to rule 9 and which are otherwise available for inspection shall be made by any
person in electronic form.
Rule 15: Any person may-
(a) Inspect the documents kept by the registrar, being the documents filed by him under
this Act or The Companies Act, 1956 or making a record of a fact required to be recorded
under this Act.
(b) Require a certificate of incorporation or a copy or extract of any other document or its
part to be certified by registrar, on payment of fee.
The Doctrine of Constructive Notice is more or less an unreal doctrine as it does not take into
account the realities of business life. The Indian courts have shown certain degree of reluctance
and caution in the application of this doctrine. This doctrine first came into play in the Charnock
Collieries case3 in 1912. The judge in this case held that:
“A stranger must be taken to have read the General Act under which the company is
incorporated and also to have read the articles of association; but he is not to be taken to have
read anything more, and if he knows nothing to the contrary he has a right to assume as against
the company that all matters of internal management have been duly complied with. The lender
in this case, advanced money to the company and was entitled to assume that the managing
agent had obtained the approval of the board of directors to the borrowing of those sums. Then
it is said that cannot be so in this case because on the document of hypothecation which was
given to the defendant the seal of the company was only attested by the signature of the
managing agents. I do not agree with the argument. The managing agents obviously have the
power under Article 50 to give a security on behalf of the company, and that security can be
either by way of mortgage or a charge on any part of the property of the company. It seems to
me on all these grounds that the defendant is entitled to a charge upon the monies in the hands
of the attorney of the liquidators.”
In my view, the court stands right and fair in its verdict as the contracting party does not have
knowledge of what is happening within the doors of the company even if he has knowledge as
to the public documents. Here the lender is under the presumption that the managing agent
has the power and the authority. Even when the managing agent did not seek directors’
approval, he is entitled under article 50 to give security on behalf of the company. Hence the
lender in this case was not at fault and the court’s judgment stands correct.
1
S. 399(1)(a) of the Companies Act, 2013, Act no. 18, Acts of Parliament, 2013
2
S. 399 (3) of the Companies Act, 2013, Act no. 18, Acts of Parliament, 2013
3
Charnock Collieries Co. Ld. vs Bholanath Dhar (1912) ILR 39 Cal 810

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The court in the Mufassil Bank case (1924)4 held that “so long as the power of delegation exists
in the articles and the act of the agent is not hit by the doctrine of ultra vires, the company is
estopped from denying its obligations under the contract in question.”
This was followed in the other cases until the case of Kotla Venkataswamy v. Rammurthy.5 The
doctrine of constructive notice was applied in this case as is. The articles of association of a
company required that all the deeds, etc should be signed by the managing director, the
secretary and the working director on behalf of the company. The plaintiff in this case, accepted
a mortgage deed executed by the secretary and the working director only. The Madras High
Court held that the plaintiff cannot claim under this deed as the court felt that if the plaintiff
would have referred the articles she would have discovered that the deed should be executed
by three specified officers. The court held that the bond was invalid.
I defer from the judgment given here by the Hon’ble Madras High Court, because in my view
the plaintiff had the liberty to presume that the approval of the managing director has been
sought. In my view the plaintiff could not have known about the internal matters of the
company and though the AOA mentions the line of authority it does not necessarily mean that
the oral approval could not have been taken. I think that the plaintiff in this case acted in good
faith assuming that the deed was lawful and correct and that the objective of the deed was in
compliance with the documents available in the public domain.
In situations where the contract is declared to be ultra vires the company’s AOA or MOA, a
person cannot claim on the ground that he was unaware of the said provision in the documents.
The principle of common law jurisprudence of corporate law provides ample protection to an
innocent person who is dealing with the company in good faith where the act concerned is not
ultra vires to the company, but the protection cannot be extended in a case where the said act
is beyond the authority of the company.
However, it was also accepted by the English courts that this doctrine has drastic impacts on the
corporate world and mainly investors. The courts are bound to apply them even if that equals to
injustice for the persons involved. At times, the provision may be vague and subject to an
internal procedure of the company. In such a scenario, the application of the Doctrine of
Constructive Notice will amount to an injustice being met on persons. Therefore, to mitigate
such a situation, the doctrine of Indoor Management was established by the courts. It has been
held to be an exception to the rule of constructive liability.

CRITICAL ANALYSIS OF DOCTRINE OF CONSTRUCTIVE NOTICE AND AN EVOLUTION OF

DOCTRINE OF INDOOR MANAGEMENT:
In my view, the doctrine of constructive notice is an unrealistic doctrine which does not take
into account the real business life. It is fictionally created by the judicial pronouncement of the
4
Ram Buran Singh vs Mufassil Bank, Ltd. (1924) AIR All 206 a
5
Kotla Venkataswamy vs Chinta Ramamurthy And Ors. (1934)AIR Mad 579

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courts. It is unrealistic how the doctrine expects every individual not only to know the facts
stated in the documents but also to understand them for what they mean. The approach of the
doctrine is so inclined towards blindly supporting the company that it does not serve the very
purpose of every law laid down i.e. justice. The doctrine puts liability on the outsider party to
such an extent that it becomes restrictive in nature.
The presumption that the other party has knowledge of the facts if he/she enters into a
contractual relationship with a company has been strongly criticized by jurists. It puts a harsh
effect on a person who wishes to transact with the company and makes the person liable to
inspect all the documents of the company.
Another very important implication of this rule is that the person who inspects the documents
has read all the documents and understood them. Not only this, but the person is expected to
be well verse with the powers granted to the company as well as to its officers. Furthermore the
documents that are available publically are not only limited to MOA and AOA but also the other
documents such as special resolutions and particulars of charges which are to be registered
with the registrar. The courts apply the doctrine even if it equals to injustice to the parties
involved.
The Allahabad High Court in Dehradun Mussoorie Electric Tramway Co. v. Jagamanandaradas 6
said that the doctrine of constructive liability cannot be applied and the Company was held
liable as the directors of the company borrowed the money which was neither in compliance
with the articles nor it was done after obtaining the resolution in the general body.
The Madras High Court in the case of official Liquidator, Manasube & Co. (P.) Ltd. v.
Commissioner of Police7 observed that the lenders to a company should acquaint themselves
with memorandum and articles, but they cannot be expected to embark upon an investigation
as to legality, propriety and regularity of acts of directors.
Since, there are no means to ascertain if necessary approvals have been obtained before a
certain officer exercises his powers which, as per articles, can only be exercised subject to
certain approvals, those dealing with the company can assume that if the directors or other
officers are entering into those transactions, they would have obtained the necessary sanctions.
This is known as the ‘doctrine of indoor management.’

THE DOCTRINE OF INDOOR MANAGEMENT:

The doctrine of constructive liability has proved to be very convenient to the management of a
company. It provides an escape to the company from explaining each and every one the rules
and regulations separately. This is a drastic presumption on the favour of the company and is
biased in its very nature. Therefore it becomes necessary for the application of the rule to be
6
Dehradun Mussoorie Electric Tramway Co. v. Jagamanandaradas(1932) AIR All 141
7
Manasube & Co. (P.) Ltd. v. Commissioner of Police (1968) Comp Cas 884 (Mad)

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made with limitations. One such very important doctrine devised to rule out the injustice
brought about by the doctrine is the Doctrine of Indoor Management.
The rule protects an individual contracting with the company where the documents of the
company are not provided for inspection and are not available in the public domain. When
certain information remains privy to the management then such a provision cannot be used to
apply the doctrine of constructive notice. In any such situation, the company is bound to
complete its side of the agreement. The doctrine of indoor management balances out the
previous rule and ensures justice.
The doctrine of indoor management is also called the TURQUAND’S RULE as it originated from
the case Royal Bank v. Turquand8. The role of doctrine of indoor management is opposed to
that of constructive notice. The latter seeks to protect the company from the outsider whereas
the former operates to protect the outsiders. In the case Premier Industrial Bank ltd. v Carlton
Mfg Co Ltd9 it was stated that “if directors have power 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, the person contracting is not bound to go through all those preliminaries.
He is entitled to presume that the directors are functioning lawfully.”
The doctrine finds its legal backing in section 20(7) and section 20(8) of the Companies Act,
2013. The said sections provide that:
1. Any person dealing with the company in good faith is entitled to presume that the
company has complied with all the procedural and formal terms of this act in making its
decisions in exercise of its powers.10
2. Sub-section (7) must be construed concurrently with and not in substitution for any
relevant common law principle relating to presumed validity of the actions of the
company in exercise of its powers.11
In my view, the doctrine is pretty reasonable and logical as though the contracting party is
expected to go through the MOA & AOA of a company; he cannot be expected to know what
happens within the doors of the company. Internal procedures are not open to public and
hence the contracting party should not be expected to know about the company inside out.
Therefore it is only reasonable for an individual to have knowledge about the MOA & AOA of a
company and not anymore. Also it is absolutely important that the outside party checks if the
object of the contract is in accordance with and under the authority of MOA & AOA and then
can a presumption be made that the company has fulfilled all the internal regulations.
The doctrine simply states that the indoor affairs of the company are to be tackled by the
company otherwise the company has to bear its consequences. This doctrine is places a special
emphasis on directors who act on behalf of the company. Persons contracting with the
company can presume that the acts undertaken by the directors are within their powers and
scope. So the outsider can presume the validity of any act done by the directors of the
company.

8
Royal Bank v. Turquand (1856) 6 E&B 327.
9
Premier Industrial Bank ltd. v Carlton Mfg Co Ltd (1909) 1 KB 106
10
S. 20 (7) of the Companies Act, 2013, Act no. 18, Acts of Parliament, 2013
11
S. 20 (8) of the Companies Act, 2013, Act no. 18, Acts of Parliament, 2013

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CONCLUSION:
It is imperative to acknowledge that though the doctrine of constructive notice has brought
about many repercussions, but it is important because it eases the business regulations and
provides security to the company when dealing with outsiders. And since there are a number or
contracts that take place in a company, the company cannot be expected to explain its
regulations to every contracting party separately. Thereby the party dealing with the company
is burdened with the duty to know all the rules. However, this doctrine was doing more wrong
than good because of which the doctrine of indoor notice was devised. Both these doctrines are
complementary to each other and should be read together for protecting the rights of both the
parties and ensuring that no party is at loss. The evolution of the doctrine of indoor notice
ensures the restricted application of the rule of constructive notice and hence renders justice in
its true sense.