Relation between Doctrine of Constructive

Notice and Indoor Management

HIDAYATULLAH NATIONAL LAW UNIVERSITY

CORPORATE LAW PROJECT
ON
RELATION BETWEEN DOCTRINE OF CONSTUCTIVE NOTICE AND
INDOOR MANAGEMENT
SUBMITTED TO
MS. APOORVI SHRIVASTAVA
SHASHWAT DUBEY
SEMESTER V
ROLL NO. 139
SUBMITTED ON 10TH OCTOBER 2014

Relation between Doctrine of Constructive

Notice and Indoor Management

ACKNOWLEDGEMENT

I would like to sincerely thank the Corporate Law Teacher Ms Apoorvi Shrivastava for giving
me this project on the Relation between Doctrine of Constructive Notice and Indoor
Management which has widened my knowledge on the Doctrine under Corporate Law and
the relations between them. Her guidance and support has been instrumental in the
completion of this project .Thank you Maam for your consistent support.
Id also like to thank all the authors, writers and columnists whose ideas and works have been
made use of in the completion of this project.
My sincere gratitude also goes out to the staff and administration (HNLU) for the
infrastructure in the form of our library and IT lab that was a source of great help in the
completion of this project.
I would also like to thank my friends who have lended me constant support through guidance
and inputs which has led to the completion of this project.

SHASHWAT DUBEY
SEMESTER V

Relation between Doctrine of Constructive

Notice and Indoor Management

CONTENTS
CHAPTER 1

INTRODUCTION................................................................(4-5)

OBJECTIVE OF STUDY.....................................................(6)

RESEARCH METHADOLOGY...........................................(6)
CHAPTER 2: DOCTRINE OF CONSTRUCTIVE NOTICE AND
BACKGROUND

BACKGROUND TO THE DOCTRINE OF CONSTRUCTIVE

.

NOTICE................................................................................(7-8)

THE DOCTRINE OF CONSTRUCTIVE NOTICE.............(9-11)

CHAPTER 3: EVOLUTION OF DOCTRINE OF CONSTRUCTIVE
NOTICE AND ITS RELATION WITH INDOOR MANAGEMENT

CRITICISM OF DOCTRINE OF CONSTRUCTIVE NOTICE:

EVOLUTION OF INDOOR MANAGEMENT..................(12-13)

RELATIONSHIP: DOCTRINE OF CONSTRUCTIVE

NOTICE & INDOOR MANAGEMENT............................(14-15)

CHAPTER 4: CONCLUSION

CONCLUSION.....................................................................(16)
BIBLIOGRAPHY AND WEB REFERENCES ............................(17)

Relation between Doctrine of Constructive

Notice and Indoor Management
CHAPTER I: INTRODUCTION AND OBJECTIVES OF THE
RESEARCH

1.1 Introduction

The doctrines of constructive notice and indoor management are essentially rules of prudence
which facilitate business transactions between a company and an outsider. The Doctrine of
Constructive Notice provides that persons dealing with a company are deemed to have
knowledge of whatever is contained in the company's constitution and other public
documents of the company, especially as it relates to the powers, functions and duties of the
companys directors. The basis of this imputation is that these are public documents and
therefore open to inspection by anybody. The doctrine operates on the assumption that people
doing business with a company will be sufficiently motivated to check the company's
constitution or other public documents to ensure that the transaction they are entering into is
not only allowed but to determine whether there are any internal formalities that must
be complied with. The end result of the doctrine of constructive notice is that an individual or
juristic entity that deals with a company is presumed to be informed of any required internal
formalities or constraints prescribed by the company's public documents, mainly the
constitution, relating to the transaction and the authority of the person representing the
company in the transaction. The individual or entity is thus prohibited from denying
knowledge of the formalities or constraints.
The doctrine of indoor management is an exception to the rule of constructive notice. It
imposes an important limitation on the doctrine of constructive notice. According to this
doctrine "persons dealing with the company are entitled to presume that internal requirements
prescribed in memorandum and articles have been properly observed". A transaction has two
aspects, namely, substantive and procedural. An outsider dealing with the company can only
find out the substantive aspect by reading the memorandum and articles. Even though he may

Relation between Doctrine of Constructive

Notice and Indoor Management
find out the procedural aspect, he cannot find out whether the procedure has been followed or
not. For example, a company may have borrowing powers by passing a resolution according

to its memorandum and articles. An outsider can only found out the borrowing powers of the
company. But he cannot find out whether the resolution has in fact been passed or not. The
outsiders dealing with the company are presumed to have read and understood the
memorandum and articles and to see that the proposed dealing is not inconsistent therewith,
but they are not bound to do more; they need not inquire into the regularity of the
internal proceedings as required by the memorandum and articles. They can presume that all
is being done regularly. The doctrine of indoor management is also known as the
TURQUAND rule.

Relation between Doctrine of Constructive

Notice and Indoor Management

1.2 OBJECTIVES OF RESEARCH:

Critically examining the Corporate Law Doctrines so as to comprehend the relationship between the
Doctrine of Indoor Management and Constructive Notice.

1.3 RESEARCH METHODOLOGY:

This project work is descriptive in approach and is based on the researches carried out to
study the Doctrines under the Corporate Law and the relationship which exists between them.
Books & other references as guided by faculty of Corporate Law have immensely helped in
the completion of the project.

Relation between Doctrine of Constructive

Notice and Indoor Management

CHAPTER II: DOCTINE OF CONSTRUCTIVE NOTICE AND

BACKGROUND
2.1: Background to the Doctine of Constructive notice
The Doctrine of Constructive Notice to be studied in depth requires a preliminary study of
various doctrines that have together blended in to create the situation that in turn led to the
inception of the Doctrine of Constructive notice. These doctrines are The doctrine of
Apparent authority of an agent on one hand and the doctrine of Ultra vires on the other. This
area of company law represents its blend with the law of agency. The company, as is clear to
us, only acts through its agents.1 Hence, the law of agency is applicable to the acts of the
companys agents who enter into contractual relationships on behalf of the company.
An agent may possess two kinds of authorities, actual or apparent. While actual authority
indicates factual conferment of authority on an individual, apparent authority should first be
taken to mean that there is no real authority but a kind of presumed authority due to
suggestive circumstances. This principle was suitably defined in Freeman and Lockyers
case, but it is still often confused with implied authority. But it must be remembered that
apparent authority is nothing but the impression in the mind of the third party. The crucial
distinction between the two lies in the fact whether there exists a relationship between the
principal or the agent. The Doctrine of Apparent authority was also elaborated in Lockyer and
Freemans Case by Diplock L.J.6 The requirements that he puts forth for the existence of
actual authority clearly highlight that the basis of such an authority is not the existence of any

1 Freeman and Lockyer v. Buckhurst Park Properties Ltd., [1964] 2 QB 480.: Per Diplock
LJ: An Actual Authority is a legal relationship between the principal and the agent
created by a consensual agreement to
which they alone are parties. Its scope is to be ascertained by applying ordinary
principals of
contractsthe usages of the trades, or the curse of business between the parties. To thi
agreement the
Contractor [Third Party] is a stranger; Nevertheless, if the agent does enter into a
contract, it does
create contractual rights and liabilities between the principal and the contractor.

Relation between Doctrine of Constructive

Notice and Indoor Management
such authority but a representation by the principle. This kind of authority is treated distinct
from the person and

depends on the representation made by the principal to the world at large. This representation
maybe through expression or direct implication of the principals conduct, or through the
principles general treatment of the agent, say by giving him a particular position, the
outcome of which would ordinarily include bestowal of such authority on the agent. Such
emphasis on representation then brings apparent authority to be further grounded in the rule
against estoppel. The former conduct of the principal is more easily linked to the rule of
estoppel but the latter, general, conduct of the principal is a link made more artificially. Often
the two categories overlap as every representation, as a matter of practice has some elements
of both generality and specificity. However, it must be kept in mind that the representation
should have credibility to be reliable. Thus, for this purpose, the principle, who makes the
representation should have actual authority to do that act, otherwise, it may not be tenable to
assume that one may create a chain of agents and sub-agents with no actual authority at the
root of such ostensible authority.
This rule was applied to company law as well in Hely-Hutchinson case wherein it was held
that de facto discharge of duties of a position result in ostensible authority.2

2 Hely Hutchinson v. Brayhead Ltd., [1968] 1 QB 549. Here, Lord Pearson held:Now
there is not usually any direct communication between the Board of Directors and the
Outside
contractor. The actual communication is made immediately and directly, whether it be
express or implied,
by the agent to the outside contactor. It is, therefore, necessary in order to make a case
of ostensible
authority to show in someway that such communication which is made directly by the
agent is made
ultimately by the responsible parties, the Board of Directors

Relation between Doctrine of Constructive

Notice and Indoor Management

2.2 The Doctrine of Constructive Notice

Section 610 of the Companies Act, 1956 provides the inspection, production and evidence of
documents kept by Registrar. It provides that 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 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. The Companies Act, 1956 defines the memorandum as memorandum
means the memorandum of association of a company as originally framed or as altered from
time to time in pursuance of any previous companies law or of this Act.3 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.

3 Section 2(28) of Companies Act 1956

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Relation between Doctrine of Constructive

Notice and Indoor Management
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 rule of constructive notice extends not merely to Memorandum and Articles but also to
all such documents as are required to be registered with the Registrar of Companies. There is
however no constructive notice of documents which are filed with the Registrar of
Companies for the sake of record only.
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. The courts in India do not seem to have taken it seriously though. For
example, in Dehra Dun Mussorie Electric Tramway Co. v. Jagmandardas4, the Allahabad
high court allowed an overdraft incurred by the managing agent of a company when under
the articles the directors had no power to delegate their borrowing power.

4 AIR 1932 All 141

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Relation between Doctrine of Constructive

Notice and Indoor Management
The European Communities Act, 1972 contained the provision of constructive notice, which
has now abrogated. A person who dealt with a company was at common law deemed to have
notice of the contents of its memorandum and articles of association when the companys
certificate of incorporation was issued by the Registrar of Companies and such a person also
had constructive notice of the other documents which companies were required to deliver to
the registrar of companies, provided they were open to public inspection and had been
gazetted where necessary. This is no longer since an amendment was made in 1989 to the
Companies Act 1985, providing that a person shall not be taken to have notice of any matter
merely because it is disclosed in a document delivered to the Registrar of Companies and so
is available to public inspection. The statutorily modified doctrine of constructive notice may
therefore, according to the circumstances, mean that a person will be treated as being aware
of the contents of certain documents filed in respect of the company with which he deals.
These documents will tell the person who deals with the company what objects it may pursue,
how much share capital it has issued and may issue in future, how its board of directors is
constituted etc. In theory, therefore, a person who deals with a company cannot complain if a
transaction which he enters into with the company is held to be invalid because it patently
conflicts with the provisions or requirements of those documents which he could, and should
in the circumstances, have inspected, at the companies registry.

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Relation between Doctrine of Constructive

Notice and Indoor Management

CHAPTER III: EVOLUTION OF DOCTRINE OF INDOOR

MANAGEMENT AND ITS RELATION WITH CONSTRUCTIVE
NOTICE
3.1 Criticism of Doctrine of Constructive Liability: Evolution of
Doctrine of Indoor Management
The rule of constructive notice has proved too inconvenient for business transaction,
particularly where the directors or other officers of the company were empowered under the
articles to exercise certain powers subject only to certain prior approvals or sanctions of the
shareholders. Whether those sanctions and approvals had actually been obtained or not could
not be ascertained because in real situations, the investors, vendors, creditors and other
outsiders could not dare to ask the directors in so many words about those sanctions having
been obtained or to produce the relevant resolutions. Since, there are no means to ascertain
whether necessary sanctions and 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 and was first laid down in the case of Royal British
Bank v. Turquand.

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Relation between Doctrine of Constructive

Notice and Indoor Management
The doctrine of indoor management is an exception to the rule of constructive notice. It
imposes an important limitation on the doctrine of constructive notice. According to this
doctrine "persons dealing with the company are entitled to presume that internal requirements
prescribed in memorandum and articles have been properly observed". A transaction has two
aspects, namely, substantive and procedural. An outsider dealing with the company can only
find out the substantive aspect by reading the memorandum and articles. Even though he may
find out the procedural aspect, he cannot find out whether the procedure has been followed or
not. For example, a company may have borrowing powers by passing a resolution according
to its memorandum and articles. An outsider can only found out the borrowing powers of the
company. But he cannot find out whether the resolution has in fact been passed or not. The
outsiders dealing with the company are presumed to have read and understood the
memorandum and articles and to see that the proposed dealing is not inconsistent therewith,
but they are not bound to do more; they need not inquire into the regularity of the
internal proceedings as required by the memorandum and articles. They can presume that all
is being done regularly.
The doctrine of indoor management is also known as the TURQUAND rule. The rule is
based on public convenience and justice and the following obvious reasons:
1. The internal procedure is not a matter of public knowledge. 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.
2. The lot of creditors of a limited company is not a particularly happy one; it would be
unhappier still if the company could escape liability by denying the authority of officials to
act on its behalf.
The Courts in India have also been reluctant in applying the doctrine of constructive liability.
The Allahbada High Court in Dehradun Mussoorie Electric Tramway Co. v.
Jagamanandaradas case rejected the doctrine of constructive liability and the Company was
held liable to the party to the transaction even 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 Police5 observed that the lenders to a company should acquaint themselves
5 [1968] 38 Com Cases 884. (Mad)
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Relation between Doctrine of Constructive

Notice and Indoor Management
with memorandum and articles, but they cannot be expected to embark upon an investigation
as to legality, propriety and regularity of acts of directors.

3.2 RELATIONSHIP BETWEEN THE DOCTRINE OF

CONSTRUCTIVE NOTICE AND INDOOR MANAGEMENT
As criticisms of the doctrine of constructive notice, the new theory called the doctrine of
indoor management has been evolved by the courts. The doctrine of constructive notice seeks
to protect the company against the outsider; the other doctrine operates to protect outsiders
against the company. The rule of indoor management is based upon obvious reasons of
convenience in business relations. Firstly, the memorandum and articles of association are
public documents, open to public documents. But, the details of internal procedures 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.
The doctrines of constructive notice and indoor management are essentially rules of prudence
which facilitate business transactions between a company and an outsider. The former favours
the company in dealing with ordinary members of the public and provides that no outsider in
dealing with the company may claim that he was unaware of certain provisions in the
memorandum or articles of association. It seeks to estop such a person from ever pleading
that he had not read these documents as the presumption is always that all such persons in
their dealings have read these documents and understand their implications. While the
doctrine of constructive notice thus greatly facilitates the business transactions from the
companys point of view, it has an important exception, namely, the doctrine of indoor
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Relation between Doctrine of Constructive

Notice and Indoor Management
management. Simply put, the doctrine of indoor management provides that an outsider is
entitled to rely on the presumption that all procedures have been followed on the part of the
company and the company cannot rely on any procedural irregularity after the deal with any
outsider has been concluded.
The doctrine of indoor management is founded on practical reasons of convenience in
business relations.
First, even though articles and memorandum of association are public documents, any
member of the public is not privy to all internal procedures in a company and thereby, cannot
make an informed decision .
Second, and more importantly, the doctrine of constructive notice would be subject to great
abuse by the companies if the doctrine of indoor management is not available. Therefore, to
curb such malicious activity, the doctrine of indoor management has been used by courts of
law.
Thus, there exists a very close relation between the two doctrines.

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Notice and Indoor Management

CHAPTER IV: CONCLUSION

In this project, I have analysed the Doctrine of Constructive Notice and the rule laid down in
the Turquand case which gave rise to the Doctrine of indoor Management. The rule which
later came to be known as the doctrine of indoor management was carved out so as to prevent
the doctrine of constructive notice, used by companies to their advantage, from becoming an
impediment to trade and commerce as otherwise third parties would be seriously affected if
constructive notice was applicable in all cases.
The doctrine of indoor management seeks to protect the interest of the shareholders who are
in minority or who remains in dark about whether the working of the internal affairs of the
company are being carried out in accordance with the memorandum and articles. It lays down
that persons dealing with a company having satisfied themselves that the proposed
transaction is not in its nature inconsistent with the memorandum and articles, are not bound
to inquire the regularity of any internal proceeding.
However, the doctrine of indoor management cannot also be applied over-extensively. In
essence, a harmonious balance has to be maintained so as to promote business transactions
between the company and third parties. Thus the doctrine of indoor management cannot give
validity to a transaction where there is no authority; it can only apply as an exception to the
doctrine of constructive notice.
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Relation between Doctrine of Constructive

Notice and Indoor Management
Thus so as to prevent gross injustice to the third party which cannot be expected to have
knowledge of the internal affairs of the Company, the Doctrine of Indoor Management was
introduced.
It emerged as a criticism to the doctrine of Constructive Notice and has a close relationship with it as was
discussed in the project.

BIBLIOGRAPHY

MC bhandari, Guide to Company Law Procedures, 21st edition, Lexis Nexis

Publication, New Delhi, 2012.

Ashok K Bagnal, Company Law, 10th edition, Indian Publishing Company, 2013.

WEB REFERENCES

http://www.lawnotes.in/Doctrine_of_Indoor_Management
http://www.llphelpline.com/documents/Applicability-Doctrine-Indoor-

Management.pdf
http://www.lawteacher.net/business-law/essays/doctrine-of-constructive-notice-

business-law-essay.php
http://ravneetarora.blogspot.in/2013/08/doctrine-of-constructive-notice-and.html

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