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Constructive Notice and Doctrine of Indoor


Management
Submitted to:
Dr. Dayananda Murthy C P
Associate Faculty of Law

Submitted by:
Permanika Chuckal
VIIth Semester
2012075

Damodaram Sanjivayya National law University

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ACKNOWLEDGMENT

I would like to express my special appreciation and thanks to my advisor, my Faculty , who has
been a tremendous mentor for me. I would like to thank you for encouraging my research, advice
for the research has been priceless.
I would extend my thanks to the University Authorities, for providing me with is opportunity to
submit my project. I am indebted to all those who have helped me in developing this project for
their suggestion and guidance.
Permanika Chuckal
2012075

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INDEX
Table of Cases

Table of Statutes

Introduction

Chapter 1: Doctrine of

Constructive Notice and

Chapter

1.1: Background to the

Chapter

1.2: The

Chapter

1.3: Problems

Doctrine

Chapter 2: Doctrine of

Doctrine

of

with

Chapter

2.1: Inception

of

Chapter

2.2: Indoor

Chapter

2.3: Doctrine of

Constructive

the

Indoor

of

Doctrine

Background

Constructive

Notice

Notice
of

Constructive

Management: The Turquand

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Notice

12

Rule

14

the Doctrine

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management and laws of Agency; What should apply?


Constructive Notice:

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Positive

Chapter 3: Indian Position on the Doctrines of Constructive Notice and Indoor

19
Management
21

Chapter

3.1: Adoption and treatment of the Doctrines

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Chapter

3.2: Current Position of Law in the Matter

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Chapter

3.3: Indian Position on the Doctrines: Analysis

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Chapter

3.4: Director

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as

Fiduciary/Trustee

or Agent?

Conclusion

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Bibliography

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Table of Cases
English Cases:

1. Ashbury Railway Carriage and iron Co. Limited v. Riche, (1875) LR 7 HL 653.
2. B. Liggett (Liverpool) Ltd. v. Barclays bank ltd., [1928] 1 KB 48.
3. Biggerstaff v. Rowatts Wharf ltd., [1896] 2 ChD 93 (Court of Appeal)
4. British Thomson-Houston Co. Ltd. v. Federated European Bank Ltd., [1932] 2 KB
176 (Court of Appeal).
5.

Egyptian International Foreign trade Co. v. Soplex Wholesale supplies Ltd.,

The Raffaella [1985] BCLC 404.


6. Ernest v Nicholls, [1857] 6 H Cas 401.
7.

First Energy (UK) Ltd. v. Hungarian International Bank Ltd., [1993] BCLC
1409 (Court of Appeal).

8. Freeman and Lockyer v. Buckhurst Park Properties Ltd., [1964] 2 QB 480.


9. Hely Hutchinson v. Brayhead Ltd., [1968] 1 QB 549.
10. Houghton v. Nothard, Lowe and Wills, [1927] 1 KB 246 at 267.
11. Howard v. Patent Ivory Manufacturing Co., [1888] 38 ChD 156.
12. Kreditbank Cassel GmbH v. Schenkers ltd., [1927] 1 KB 826 (Court of Appeal).
13. Mahony v. East Holyford Mining Co., [1875] LR 7 HL 869.
14. Morris v. Kanssen, [1946] A.C. 459.
15. Oakbank Oil Company v. Crum, [1882] 8 AC 65.
16. Rama Corporation LD. v Proved Tin and General Investments LD, [1952] 2 QB 147.
17. Royal British Bank v. Turquand, [1855] 5 E&B 248.
18. Ruben v. Great Fingall Consolidated, [1906] AC 439 (House of Lords).
19. Underwood v. Bank of Liverpool, [1924] 1 K.B775.

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Indian Cases
1. Albert J. Judaih v. Rampada Gupta, AIR 1959 Cal 715.
2. Charnock Collieries Co. Ltd. v. Bholanath Dhar, (1912) ILR 39 Cal 810
3. Dehradun Mussourie Electric Tramway Company v. Jagmandardas, AIR 1932 All
141
4. Kirlampudi Sugar Mills Ltd. v. G. Nageshwara Rao, [2003] 114 CompCas 563 (AP)
5. Kotla Venkataswamy v. Rammurthy, AIR 1934 Mad 579
6. Lakshmi Ratan Lal Cotton Mills v. J.K. Jute mills Co., AIR 1957 All 311.
7. P.Rangaswami Reddiar v. R. Krishnaswami Reddiar, AIR 1973 Mad 251
8. Ram Buran Singh v. Mufassil Bank, AIR 1925 All 206 a
9. Seethalakshami v. Narayan Swamy, (1922) 15 LW 205.
10. T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon and Co., AIR 1936 Bom 62.

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Table of Statutes
English Statutes
1. Companies Act, 1856.
2. Companies Act, 1913.
3. Companies Act ,1948.
4. Companies Act, 1985.
5.

Companies Act, 2006.

Indian Statutes:
1. Companies Act, 1956.
2. Indian Contract Act, 1872.

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INTRODUCTION
This Project is an analysis of the Doctrines of Constructive Notice and Indoor Notification. This
project delves into the nature of the Doctrine of Constructive notice to understand its
implications on the commercial world. Doctrine of Constructive Notice was introduced in the
earliest days of the modern companies law. At that time, the concept of limited liability was not
yet born and the insecurity posed by this doctrine to the creditor, was balanced by the risk of the
shareholders in incurring unlimited liability. However, with the arrival of Limited liability, the
judiciary constantly has tried to bypass or do way with this doctrine completely.
Constructive notice is the legal fiction that signifies that a person or entity should have known, as
a reasonable person would have, even if they have no actual knowledge of it. For example, if it is
not possible to serve notice personally then a summons may be posted on a court house bulletin
board or legally advertised in an approved newspaper. The person is considered to have received
notice even if they were not aware of it.
In companies law the doctrine of constructive notice is a doctrine where all persons dealing with
a company are deemed 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. In
India the rule was never too strictly applied but continues to persist.

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Chapter 1: Doctrine of Constructive Notice and Background


Chapter 1.1: Background to the Doctrine 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
1

its agents. 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
2

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
3

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
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Diplock L.J. 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 such authority but a
representation by the principle. This kind of authority is treated distinct from the person and
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.
2

Freeman and Lockyer v. Buckhurst Park Properties Ltd., [1964] 2 QB 480.

J.L. Montrose, the Apparent Authority on an Agent of a Company, Vol. 50, L. Q. Rev., 224, 226 (1934).

Boyle and Birds Company Law, 118 (1 Indian Reprint, 1997)

st

Id.

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An apparent or ostensible authority is a legal relationship between the principal and the contractor
created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the
contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind
within the scope of the apparent authority, so as to render the principal liable to perform any obligations imposed
upon him by such contract. To the relationship so created the agent is a stranger. He need not be (although he
generally is) aware of the existence of the representation but he must not purport to make the agreement as principal
himself. The representation, when acted upon by the contractor by entering into a contract with the agent,
operates as an estoppel, preventing the principal from asserting that he is not bound by the contract, it is
irrelevant whether the agent had actual authority to enter into the contract.

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
8

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
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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
10

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.

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Now we must look at the issue of the agent exceeding his/her authority. The agent of a company
may exceed his/her authority in two ways. Firstly, the act of the agent may be ratifiable by the
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Company and secondly, the act may be outside the legal capacity of the company to ratify. We
shall deal with the latter case first while we elucidate the doctrine of Ultra vires vis--vis the
authority of an agent.
Now turning to company law, this general rule of agency has to be more specifically applied.
The authority of an agent here, actual or apparent ,are both hit by the Doctrine of Ultra vires.
Here, the company is not bound by a contract or any other act of its agent, in the exercise of
7

Supra note 3 at 228.

Supra note 2 at 503.

Bowstead and Renolds on Agency, 309-310 (F.M.B. Reynolds ed., 16 Edn., 2001)

th

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11

Supra note 2 at p.505

11

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
12

Ever since the Companies Act 1856, all companies acts have prescribed an object clause to be incorporated
in the memorandum of association of the company. For instance, Sec. 2(1)(c) of the English
companies act 1985 and Sections 13(1) (c) and (d) of the Indian Companies Act 1956 make it mandatory for the
Company to mention its objects in its Memorandum of Association. Such a requirement is necessary for the
protection of the shareholders, who would, as Sealy puts it, ideally not like to see their savings squandered
for ludicrous purposes other than the one for which they had invested in the company in the first place.

His or

her agency, that the company, by virtue of its Articles or the memorandum, had no legal

capacity to enter. Such an act may not be binding on the company whether the authority of the
agent is actual or apparent.

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Chapter 1.2: Doctrine of Constructive Notice


However, sometimes while the act may not be ultra vires the companys legal authority, it may
still not be in the agents power to perform that act in the course of his/her agency. In case he
he/she still goes ahead to perform that act, the question of authority of an agent becomes
applicable in the company law. The negative application of the wider Doctrine of Apparent
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Authority came to be known as the Doctrine of Constructive notice.

Simply put, the Doctrine of Constructive Notice was first envisaged as early as 1857 with
respect of Deed of Settlement companies where it was held that a person dealing with a
company should be deemed to have notice of that companys registered constitutional
15

documents. By, extension, it also came to be held that such person should also have understood
16

the provisions of these documents. These Documents may not only include the articles and the
memorandum of association, but also special resolutions and particulars of charges which are
required to be filed with the registrar. However, the ambit of constructive notice does not seem
to have covered the matters filed by a company to disclose the financial information and other
17

information, in order to assist the shareholder to make an informed judgment. However, the
scope remained uncertain and now is only a matter of academic interest in common law, due to
Companies Act 1989.

18

Ashbury Railway Carriage and iron Co. Limited v. Riche, (1875) LR 7 HL 653;

12

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I.D. Campbell, Cntract with companies: II The Indoor Management Rule, Vol. 76, LAW QUARTERLY
REVIEW, 115, 117 (January 1960); The Doctrine of Constructive Notice has been held to only act against the
contractor and not in his favour. Moreover, the officers of the company cannot be said to assume more power
than the constitutional documents of the company permit. Campbell is also quick to admit that the rule is only
applicable if there is usual or ostensible authority in the given case. Since for the purpose of this project, usual
authority is considered a form of ostensible authority, they are one and the same.
15

Ernest v Nicholls, [1857] 6 H Cas 401; While the case dealt with deed of settlement companies, the
Doctrine established would naturally come to apply more generally to the later established companies through
their Articles of Association and Memorandum of Association.
16

Oakbank Oil Company v. Crum, [1882] 8 AC 65.

17

Krishnayen Sen, Rule of Constructive notice Vis--vis the Doctrine of Indoor Management, Vol.11,
COMPANY LAW CASES, 732, 733 (2003). The doctrine of constructive notice seems to cover as per the lord of
Chancery in Ernest v. Nicholls only those documents that are available to the public in general in the Company
House.
18

th

L.S. Sealy, CASE AND MATERIALS IN COMPANY LAW, 216 (7 edn., 2001); Companies Act of 1989 that came
into force in 1991, abolished the doctrine of ultra vires as well the Doctrine of Constructive notice.

This doctrine, by itself, seeks to nullify the assumption of ostensible authority of the agent as it
places a burden on the third party contractor to make additional inquiries into the registered
documents of the company and infer the extent of the agents authority on that basis as well, in
order to protect the company from outsiders. Thus, the rule may not apply to favour the third
party, but only against it.
Chapter 1.3: Problems with the Doctrine of constructive Notice
There has been considerable judicial debate in cases, where the company itself has made
representations of apparent authority or the belief of the third party in the authority of the agent
stems from some other source than a reading of the Articles of the company, can the third party
allege that upon reading the articles of association of the company, such authority of the agent
would have been apparent and thus the third party must be assumed to have constructive notice
of the articles? The judicial opinion on the question is largely divided as to whether the doctrine
19

may operate for the third party. But this question will be analysed by the researchers in detail
in the next chapter where principals of agency are applied to the doctrine of indoor management.
This is to mean that the third party may not be allowed to use this rule to claim constructive
knowledge of the articles of the company to infer the authority of the agent to enter into a contract,
when they do not have actual knowledge of the articles.
The last proposition is itself, highly problematic, but the doctrine itself also creates an unfavorable
climate for business as it creates a disproportionate burden on part of the third party, which was, in
turn, impeding smooth trading. This perception of the doctrine is strongly criticized, unanimously
by the jurists as well as writers. It is not at all a logical chain of reason that, because the law gave

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everyone the opportunity to find out about a companys registered documents, there was a
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corresponding duty on part of the third party to peruse through these documents. One justification
of having this rule in place was that limited liability companies did not exist at that point of time
and the risk was always on the unwitting shareholder. Thus, the effort of the third party was
counterbalanced by the risk on part of the shareholder. However, once limited liability became
the general norm in company law, the real risk shifted from the
shareholder to the creditor and the rule ceased have such a justification. Moreover, in the

19

Houghton v. Nothard, Lowe and Wills, [1927] 1 KB 246 at 267; This means that the contractor may not invoke

the doctrine of Constructive notice to emphasize the contractual liability of the company without ever relying
on the articles while entering into the contact with the said company.

modern times, the business decisions must be made promptly and the registered documents may
only be obtained from the registrars office at great expense of time and effort.

20

Even before the Limited Liability company was born, the Doctrine of Constructive notice had
the potential of creating an unnecessary risk in the minds of the Third party. Hence, as early as
1856, legal measures were taken to mitigate the worst of the implications of the constructive
notice rule.

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20

Supra note 14 At 215-216.

Chapter 2: Doctrine of Indoor Management: The Turquand Rule


Chapter 2.1: Inception of the Doctrine
21

In the famous case of Royal British Bank v. Turquand, the court set forth a proposition of law
that later came to be called the Doctrine of Indoor Management. The doctrine states that if a
person in good faith deals with the board of directors or any other representative body of a
company which is in fact exercising the power of management and direction of its business and
affairs, that person is not affected by defects of procedure within the company or by its failure to
fulfill conditions which are required by the companies memorandum or articles to be fulfilled
before the act or transaction in question is affected.

22

While many authors have argued that the rule is an exception to the rule of Constructive notice,
some also feel that the doctrine serves a much wider role at a greater level. If we look at the two
doctrines with respect to the point of time when the doctrine of indoor management comes into
operation, we will notice that this doctrine does not really act so much as an exception to the rule
of constructive notice but as a limiting factor to its ambit. Essentially, under the doctrine of
constructive notice, while the third person was bound to take notice of the provisions of a
companys Memorandum and Articles, and thus identify any restrictions in the same, he/she is not
bound to inquire any further. He could take it for granted that the agent has been duly
appointed.

23

This rule has been in place for two reasons. Firstly, to limit the burden of inquiry placed on the
shoulders of the third party entering into a transaction with the company and, secondly, the third
party may not have the means to ascertain whether the inner formalities of the company are
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carried out properly or not.

Thus, the application of the Turquand rule, or the doctrine of indoor management, is restricted to
people unaware of any irregularity in the authority of the agent with whom they are contracting.

Page

15

If the circumstances so suggest, the rule would also protect any member or directors of the
21

[1855] 5 E&B 248.

22

Robert R. Pennington, COMPANY LAW, 130 (8 edn., 2001)

th

23

Mahoney v East Holyford Mining Co. [1875] LR 7 HL 869 (House of Lords): here Hatherly L.J. held that while
the third party is required to know the mode of appointment and the duties of the Directors, beyond that the
where there are person conducting the affairs of the company in a manner that seems perfectly consonant with
the articles of association, then those dealing with them, externally are not to be affected by any irregularities
which may take place in the internal management of the company.
24

Supra note 16 at 218.

company due to their ignorance with regards to that particular transaction that they seek to
25

enforce. Conversely, any outsider who has true knowledge of the affairs of the company or is put
on inquiry would not be protected by this rule.

26

Some questions that arise in relation to the Doctrine of Indoor Management are mostly with
respect to its ambit as we shall notice in the next sub-chapter.
Chapter 2.2: Indoor Management and the Laws of Agency: What should apply?
Firstly, it must be made clear that the doctrine of indoor management doesnt apply to forged
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documents as has been made clear in the Ruben case wherein it was clearly held that a forged
document is a pure nullity. However, given the wide ambit of such a ban, there are exceptions to it,
such as when an agent of the company, with actual or ostensible authority, represents the
document to be genuine. Even in cases where the agent may represent his own authority to be
genuine, such forgeries will not amount to nullity as such but general principles of company law
28

29

would apply. Even in the Kreditbank case forged documents were held to be null and void.
Now looking at the rule of indoor management at a wider angle, one would see it as a protection
for the third party against improper appointment and thus defective authority of the agent but it
would still assume that there has to be at least an ostensible authority with the agent for the
doctrine to apply.

30 31

However, there might be cases when the agents authority itself is

question, that is to say that it is alleged there is no authority at all but a sweeping application of
the Turquand rule would bind the company to any transaction entered into by any of its agents

See Helly-Hutchinson, [1968] 1 QB 549; Howard v. Patent Ivory Manufacturing Co., [1888] 38 ChD
156.

16

25

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B. Liggett (Liverpool) Ltd. v. Barclays bank ltd., [1928] 1 KB 48; Howard v. Patent Ivory Manufacturing Co.,
[1888] 38 ChD 156: here,It has been held that where the third party can be assumed to have notice of the internal
irregularity or could have noticed the irregularity through ordinary care and caution, the rule of indoor management
would not protect the third party.
27

Ruben v. Great Fingall Consolidated, [1906] AC 439 (House of Lords)

28

Supra Note 16 at p. 227.

29

Kreditbank Cassel GmbH v. Schenkers ltd., [1927] 1 KB 826 (Court of Appeal).

30

Morris v. Kanssen, [1946] A.C. 459

31

Vincent Powell-Smith, THE LAW AND PRACTICE RELATING TO COMPANY DIRECTORS, 119 (1969). This rule
basically means to say that where articles give full power to the board to delegate its functions to a director or
any other officer of the company, then it follows that any outsider is entitled to assume, unless he has knowledge to
the contrary, that such power has been delegated to such an agent of the company who purports to exercise it

who could have been empowered by the company to do so and thus create an unnecessary risk
32

for the company.

Such was indeed the case in the early years of its inception as the indoor management rule was
applied liberally and it was held that if there is de facto exercise of power by a person then he may
be thought to be represented as occupying a position that would allow such exercise of power. It
would benefit now to retrospectively analyze the application of indoor management
33

rule with respect to the principles of agency In Biggerstaffs case the director in question
discharged the functions of the managing director and the articles provided for the appointment
of a managing director but there was a lack of evidence as to whether the director in question
34

was appointed to the position. The court, referring to Lindley held that so long as there was a
power to appoint and the third party has no notice of any irregularity in the appointment, the
company is bound by the acts of the agent within the usual course of his authority.
Thus, in such cases it is not enough for the court to rely on the rule of indoor management only. In
fact, in the Kreditbank case

35

the English court finally restricted the ambit of indoor

management by stating that not just anyone who could have been delegated the authority to enter
36

into a transaction on behalf of the company may be allowed to do so. This judgment by
questioning the principal of agency in the doctrine of indoor management seems to usher in the
general principals of agency into company law.
Thus, we come to a second kind of situation where the agent exceeds his/her authority. Unlike
indoor management rule, there is no defective bestowal of authority, but a lack of authority
altogether.
Since, now the question was whether the agent who purports to bind the company with his deeds
has the authority to do so or not, questions of actual and ostensible authority came into the
purview of this research paper. The court also increasingly came to rely on the holding out

32

Supra note 12, See Campbell at 115.

33

Biggerstaff v. Rowatts Wharf ltd., [1896] 2 ChD 93 (Court of Appeal)

34

Lindley on Companies, 159 (5 Edn.)

35

Kreditbank Cassel GmbH v. Schenkers ltd., [1927] 1 KB 826 (Court of Appeal).

36

th

The Court Felt that the doctrine if allowed to applicability unbridled, then the logical conclusion of such a doctrine
would be extremely alarming Anyone who has the pen of a ready writer need only sit down and write a bill of
exchange in the name of a company having an article in this form, and the company would presumably be bound
when the bill got into the hands of a holder for value without notice. It was further held that there needs to be
evidence for authority to exist with the agent who has bound the company in the given transaction.

principal, where the principal makes a representation of the agent having the requisite authority,
which was already discussed in the preceding chapters under the doctrine of apparent authority.
As already discussed, the principal may make a representation giving authority to the Third
Party in two ways: firstly, by making an express or implied representation to the third party of
granting an authority to the agent to act in a particular transaction and, secondly, by giving the
37

agent a position with which certain powers are usually associated. The usual authority that
follows the position of the contracting agent is an important factor and was used to bind the
38

company in the First Energy Case in conjunction with a representation by the agent himself to
that effect.
In cases where it is alleged that there is no authority with the agent, the company may be
estopped from denying authority to its agent if it has resorted to any of the two alternatives but the
rule has been applied strictly to determine as to when a person can rely on the ostensible authority
39

of the agent of a company. In the case of Rama Corporation. , there was some clarity given to the
plethora of seemingly conflicting decisions on the exact limitation on the indoor notification rule.
The court crystallized the principal to mean that the exact ingredients to construe apparent
or ostensible authority of the agent by the third party should be De facto
exercise of power and a representation of actual authority though such representation may be
express or implied. Also, this principle reconciles with the Turquand rule favorably as the question
that the rule essentially deals with is that of De Jure execise of power. The Doctrine of Indoor
40

Notification was also further limited in Houghton and Co. case through the judgment of Bankes
L.J., who held that the unusual nature of the transaction should put the third party on inquiry about
the real authority of the transacting party an thus render the rule inapplicable in
this sense.

37

Egyptian International Foreign trade Co. v. Soplex Wholesale supplies Ltd., The Raffaella [1985] BCLC
404 at 411; When a person is appointed to a post within the company, in third partys view, he is deemed to be
vested with all the powers vested ordinarily in an individual occupying that post. Some of these powers are
statutorily accorded and some are accorded through the memorandum or the articles. However, it must be noted
that in common law the managing directors authority has a wide scope due to the modern trend of the articles
allowing the board to delegate a plethora of powers to the managing director. An ordinary directors power is
considerably lesser in this respect as he might, at the most be granted the power to validate the instruments of
daily working of the company, and that too after such instruments ratification by the managing director.
38

First Energy (UK) Ltd. v. Hungarian International Bank Ltd., [1993] BCLC 1409 (Court of Appeal)

39

Rama Corporation LD. v Proved Tin and General Investments LD, [1952] 2 QB 147.

40

Houghton & Co. v. Northard Lowe & Wills Ltd., [1927] 1 KB 246.

41

However, the Final clarification was offered only in the Freeman and Lockyer case wherein it
42

43

was held that in British Thomson Houston Co. case as well as the Mahony case , where the
third partys claim was allowed, the contract was actually hit by the provisions of the Articles
and the Memorandum of association of the companies, but, more importantly, the persons
making the claim of authority were people who, in the ordinary circumstances, would seem to be
possessed of such authority by an outsider who is not familiar with the articles of the company.
However, if the persons were not so, then the contractor [third party] would not be able to claim
that they relied on the representation made unless they were proved to be familiar with the
articles of the company, in keeping with the rule of law set by Bankes L.J. in Houghton & Co.
44

case. This point is further elaborated in the next sub-chapter.


45

Moving on to cases where the claim of the third party failed, the court held that these were
cases where the transactions were of an unusual nature and the assumption of authority by an
46

outsider will not be easy to make. In none of the case could the contractors have claimed that
the agent was acting in the course of the usual authority that a person in his/her position is
expected to possess. Thus, the contractor could not have relied on the usual authority argument
47

to allege representation by the company. He/she would have to rely on the relevant provisions
of the articles of association, if any. It is in this respect that the next sub-chapter becomes relevant.

Chapter 2.3: Doctrine of Constructive Notice: Positive construction


We have already studied that where there is a power to delegate functions to an officer of the
company and such an officer purports to bind the company to a transaction, whether or not such
delegation has taken place, the courts have held that a representation of the agents authority by
the principal is necessary for the transaction to be valid. However, in chapter 1.3, we also
discussed the issue of whether or not a party, which has not relied on the articles or the
41

Freeman and Lockyer v. Buckhurst Park Properties Ltd., [1964] 2 QB 480.

42

British Thomson-Houston Co. Ltd. v. Federated European Bank Ltd., [1932] 2 KB 176 (Court of Appeal)

43

Mahony v. East Holyford Mining Co., [1875] LR 7 HL 869.

44

Houghton & Co. v. Northard Lowe & Wills Ltd., [1927] 1 KB 246.

45

Houghton & Co. v. Northard Lowe & Wills Ltd., [1927] 1 KB 246; Rama Corporation LD. v Proved Tin and
General Investments LD, [1952] 2 QB 147; Kreditbank Cassel GmbH v. Schenkers ltd., [1927] 1 KB
826 (Court of Appeal)
46
47

th

G.H.L. Fridman, THE LAW OF AGENCY, 278 (4 edn., 1976)

The argument could not have proceeded any further as the usual authority of the position that agent
currently occupies does not extend to entering into the purported transaction.

memorandum of the principal company before transaction, can later enforce the notion of
ostensible authority by claiming a constructive reading of the articles. In cases where there are
such provisions for delegation in the articles and the third party did not have any notice of such
provisions before entering into the contract, the judiciary has been inclined both ways as we saw
in Biggerstaff case

48

where the prior knowledge of the articles was not considered to be

necessary so long as there existed a power to delegate.


The first case, where this issue seems to have been that of Underwood v. Bank of Liverpool

49

where the court held that constructive notice doctrine may only act as a negative doctrine against
the third party and not in its favour.
50

However, in the subsequent case of Houghton and Co. v. Northard Lowe and Wills ltd. the
court overturned the decision of Wright J., who had followed the Biggerstaff ratio and held that so
long as their was a provision for delegation of powers, there need not be knowledge of such a
provision on part of the outsider. The Court of appeal held that the acting on a mistaken
assumption of delegation of power is still to some extent tenable in court. On the other hand, not
knowing that such delegational power even exists and still relying on it and even exercise of
such power by the company when in fact there was no such exercise, defeats all tenets of logic.

The same logic was subsequently followed in Rama Corporation case

52

51

but a conclusive

clarification was once again offered in Freeman and Lockyers judgment wherein it was held
that in cases where the transaction is not to be ordinarily within the power of the agent so
purporting, the contractor must rely on the articles of association to prove that a representation
was made and relied upon. However, if the representation was not known to the third party vide
the reading of the articles, then it defeats all logic for them to contest a reliance on the same. Thus,
it was also finally held that the Doctrine of Constructive Notice is a purely negative one
and may only be used against the third party and not to benefit it.
48

Biggerstaff v. Rowatts Wharf ltd., [1896] 2 ChD 93 (Court of Appeal)

49

Underwood v. Bank of Liverpool, [1924] 1 K.B. 775.

50

Houghton & Co. v. Northard Lowe & Wills Ltd., [1927] 1 KB 246.

51

Per Sargant L.J.: in a case like this, where that power of delegation has not been exercised and where admittedly
Mr. Dart and the plaintiff firm has no knowledge of the existence of that power and did not rely on it, I cannot for
myself see how they can subsequently make use of this unknown power so as to validate the transactionThey
might rely on their knowledge of the power of delegation, had they known of it, as
part of circumstances entitling them to infer that there had been a delegation and to act o that inference, though
it were a mistaken one. But it is quite another thing to say that the plaintiffs are entitled now to rely on the
supposed exercise of a power that was never in fact exercised and of the existence of which they were in ignorance
at the date when they contracted.
52

Rama Corporation LD. v Proved Tin and General Investments LD, [1952] 2 QB 147.

Chapter 3: Indian Position on the Doctrines of Constructive Notice and indoor


Management
Chapter 3.1: Adoption and Treatment of Doctrine of Constructive Notice and Indoor
Management
The Indian courts have since the early times shown a certain degree of caution and reluctance in
applying this doctrine to the detriment of the third party. The first application of the doctrine of
constructive notice, the the researcher could find, seems to be in the Charnock Collieries case

67

in 1912. However, the mode application is typically the position before the Kreditbank and the
Houghton cases in the common law. The judge in this case simply holds that the stranger has an
obligation to read the articles of the company, but nothing beyond. Since the articles of the
company give the borrowing power to managing agents along with providing a security on the
company, the judge holds that the company is bound by the agents acts. As early as 1924, the
68

court in Mufassil Bank case, held that so long as the power of delegation exists in the articles
and the act of the agent is not hit by doctrine of ultra vires, the company is estopped from
denying its obligations under the contract in question. The same was continued in the Pratt case.

69

70

In Dehradun Mussourie Electric Tramway Co. case the issue was that the managing agents had
taken an overdraft without the approval of the board, despite the articles prohibiting the directors
from delegating the power to borrow. The court did not apply the doctrine and held that temporary
loans need to be taken for day to day working of the business. This was in application of the rules
of agency under the Indian Contract Act. Sections 188 and 189 of the act that extensively
empower the agent to take all necessary action to prevent losses to the principal company.
However, one point that is queer in this judgment is the issue of fact as to whether a properly
convened meeting took place to authorize the overdraft. The court takes into account that the
resolution signed was bogus as the evidence suggests that the required meeting never took place
and also that the third party might not have had notice of the same due to the false
representations made by the agent(the false minute-books stated that a meeting did take place),

67

Charnock Collieries Co. Ltd. v. Bholanath Dhar, (1912) ILR 39 Cal 810

68

Ram Buran Singh v. Mufassil Bank, AIR 1925 All 206 a

69

T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon and Co., AIR 1936 Bom 62.

70

Dehradun Mussourie Electric Tramway Company v. Jagmandardas, AIR 1932 All 141.

71

the court still does not apply the Ruben rule to declare the document invalid. However, it does
apply the Turquand rule and binds the company to the transaction.
The first negative application of the Doctrine of Constructive Notice is found in the case of
72

Kotla Venkataswamy v. Rammurthy, where the doctrine was applied in its usual sense and the
73

third party mortgagee was denied relief on account of the transaction being irregular in nature.
74

In Lakshmi Ratan Cotton Mills case the court once again accorded protection to the third party
by applying the Turquand Rule.
Chapter 3.2: Current Position of Law in the Matter
The recent legal position has not changed and the courts continue to apply the ratio of
75

Deharadun Mussourie Tramways Case as recently as 2002 in the Kirlampudi Sugar Mills
76

case wherein the court again held that so long as the transaction benefits the company, the
company is bound by the acts of the agent and also that the indoor management rule would be
applicable.
In fact, indoor management rule has been expressly applied as recently as 2010, wherein, it was
used to attribute liability to the company in question and also, the court established that a
77

director of a company acts in a fiduciary role.

Chapter 3.3: Indian Position on the Doctrines: Analysis


Indian law on agency and contracts has evolved differently from the Common law. One of the
most important reasons as to why the doctrines of Constructive notice and indoor management
do not gain a substantial foothold in the Indian Jurisprudence can be attributed to the Indian
Contract Act, 1872, that also deals with the law of agency in India. Section 188 of the act

71

Ruben v. Great Fingall Consolidated, [1906] AC 439 (House of Lords)

72

Kotla Venkataswamy v. Rammurthy, AIR 1934 Mad 579

73

It is noteworthy that the court indeed takes into account the rule of ostensible authority, though not under the
same name and holds that the authority of the agent would have appeared to be adequate to the mortgagee
but irrespective of any such regard, the court has declared the mortgage deed invalid as it did not contain the
signatures of the managing director as required under the articles of the company.
74

Lakshmi Ratan Lal Cotton Mills v. J.K. Jute mills Co., AIR 1957 All 311.

75

Dehradun Mussourie Electric Tramway Company v. Jagmandardas, AIR 1932 All 141.

76

Kirlampudi Sugar Mills Ltd. v. G. Nageshwara Rao, [2003] 114 CompCas 563 (AP)

77

Punj Star Industries pvt. Ltd. v. Atna Engineering pvt. Ltd. and Ors., 2010 (120) DRJ 183.
The last proposition will be further discussed in Chapter 4.4 as a necessary corollary to the judicial
stand on the issue of agent overstepping his authority.

78

defines the extent of the authority of an agent. The section incorporates the usual authority rule in it
and thus, it is easier for the Indian judiciary to take the Freeman and Lockyer approach as discussed
in Chapter 2.3. Furthermore, it has been held that this section should be interpreted to mean that
where the terms of agency are ambiguous and the agent has acted in good faith as per one
79

construction of his authority, his acts would be binding on the principal. This same
rationale seems to have been applied in the Mussourie Tramways case

80

wherein the agent was

held to be working for the benefit of the company.


Section 189 also is applicable in cases of agency with respect to a company wherein the agent is
granted the authority to do all such acts in emergency situations as would be necessary for protecting
the principal from loss.
These two sections cause a paradigm shift while evaluating the authority of an agent in the
Indian law. The burden upon the agent is not longer to prove that he/she had the authority to perform
a certain act but to prove either that their acts are for the benefit of the company or that their acts
were necessary to protect the company from loss. If that fact is proved, the agents acts are binding,
whether or not the articles of the company confer such authority upon him as necessary for those
acts. When the question of constructive notice has not arisen, the question of application of the
indoor management rule also does not arise. Simple application of the principles of agency seems to
be adequate for the purposes of this article.
Finally, the Doctrine of Indoor Notification also loses importance in light Section 86 of the
81

Companies act, 1913, that expressly endorses this rule. Thus, the Indian judiciary was never really
dealing with this issue on the same footing as the English judiciary. Our laws already favour the third
partys rights in a transaction by bringing down the burden of proof on the third party to apply the
conditions necessary to apply the indoor management rule. Ideally, the judges should have resorted to
this rule in Lakshmi Ratan Lal Cotton mills case but this section was enforced in the Albert Judan
Judah Case.

82

However, the 1956 act contains no analogous provisions and thus, the judiciary

has had to rely on principles of agency in most of the cases or


78

Section 188: An agent havng having an authority to do an act has authority to do every lawful thing
which is necessary inorder to do that thing.
An agent having an authority to carry on a business has authority to do every lawful thing necessary for the
purpose, or usually done in the course of conducting such business.
79
Seethalakshami v. Narayan Swamy, (1922) 15 LW 205.
80
Dehradun Mussourie Electric Tramway Company v. Jagmandardas, AIR 1932 All 141.
81
Kirlampudi Sugar Mills Ltd. v. G. Nageshwara Rao, [2003] 114 CompCas 563 (AP).
82
Albert J. Judaih v. Rampada Gupta, AIR 1959 Cal 715.

on the direct application of the indoor management rule with cases like Lakshmi Ratan Cotton
83

mills case as precedent.

The recent Judgments in Kirlampud Sugar Mills case

84

also shows that the judiciary is still

actively applying the law of agency in conjunction with the rule of Indoor management rather
expansively to provide benefits to the third party. This position is similar to the stance taken by the
Common law Judges in the United Kingdom. The only difference is that in the Common law, this
position is enforced by law as we have already seen in Chapter 3, while in India, first it was due to
section 86 of the 1913 Act and now, it is merely an extension of the judicial interpretation of
Section 188 of the Contract Act along with an expansive application of the Indoor Management
rule.
Chapter 3.4: Director as Fiduciary/ Trustee or Agent?
This seemingly harmless question becomes extremely important in the Indian law because Indian
85

law views agency as distinct from trusteeship. This distinction is required to be made if we are to
claim that benefit accrued to the company from the acts of the directors binds the company to the
transaction. This kind of a proposition creates an impression of trusteeship. However, Palmer
strongly asserts that Directors are mere agents of the company in the eyes of the law but also tries
to clarify as to when they may act as trustees.

86

He claims that while directors are the agents of the company, they are elected by the shareholders
to guard the their collective interests. In that sense they act as trustees to the shareholders interests in
the company. However, being in this dualistic positon, they are not entitled to claim benefits
from both sides. For Instance, he also points out that limitation under the Trustees Act may not
83

Such was the case in P.Rangaswami Reddiar v. R. Krishnaswami Reddiar, AIR 1973 Mad 251 wherein it
was held that even where there was no actual resolution authorizing a director to enter into a transaction on
behalf of the company either by the Board of directors or by the Board of managing Agents a claim of a
creditor could not be affected if the terms of its memorandum and Articles of Association authorized such a
transaction. It was also held that in such a case the person negotiating with a company is entitled to presume
that all the formalities in connection therewith have been complied with.
84
Kirlampudi Sugar Mills Ltd. v. G. Nageshwara Rao, [2003] 114 CompCas 563 (AP).
85
TH
T.S. Venkatesh Aiyer, LAW OF CONTRACTS AND TENDERS, 600 (10
Edn., 2010): Aiyer holds that
the trustee has much more power than an agent. The estate is legally vested in the trustee and he may do with it
as he like, subject to the limitations envisaged in the instrument of trust. He is also vested with the power to sue
in his own name with respect to the wrong done to the estate held in trust. However, an agent is more or less a
mirror of the principal, to act as the principal would. He has no legal rights over the property of the
owner. Also, he cannot sue or be sued, except in the name of the principal.The distinction between the two is
however blurred due to the agent having powers to exceed his authority to protect the principal from loss or to
achieve the final goal of his agency, thus encroaching into the field of Trusteeship.

86

st
Palmers Company Law, 527 (21 Edn., C.M. Schmitthoff & J.H. Thomson eds., 1968); palmer insists
that directors are agents of the company and treats their actions from a purely agency based perspective.
Later on in the chapter he goes on to concede that they may act as both.

apply to them. But he final reaches the conclusion that the true nature of the director is that of a
fiduciary.

87

He has this fiduciary relationship with the company and not the shareholders
88

individually unless he is negotiating the terms for the sale of issued shares of the company.

87

See Palmer at 526: The director for this reason is normally prohibited from contracting with himself in his
personal capacity on one hand and himself as the agent of the company on the other. But this restriction
doesnt extend to him as a shareholder of the company and he may still vote on resolutions that may affect
him in his personal capacity.
Another implication is that the Directors profits in the fiduciary position have to be accounted for infront of the
company.
88
This relationship means that if an individual shareholder approaches the director in his personal capacity

to trade his shares, he may not allege miuse of the fiduciary position in the law but where he is acting on
behalf of the shareholders as indicated above, he is fully liable to the shareholders. In this case although the
power is incidental to his position, its exercise will be on behalf of and directly affect the shareholders
individually.

CONCLUSION
This research paper upon evaluation of the Doctrine of Constructive Notice and Indoor
management has finally reached the conclusion that the doctrine have needlessly complicated the
simple matter which could have easily been resolved by a simple application of the rule of
Ostensible authority. The approach of Constructive Notice was so radically inclined to support the
Company that the reactions to it all came to support. While Constructive Notice Blindly supported
the company to an illimitable extent, the rule of indoor management supported the third party just as
blindly. Finally, law of agency was required to repair that damage as was seen in various cases
where ostensible authority became a pre-requisite for the application of indoor management rule.
This is the position in common law until the sudden arrival of Companies act 1989, that suddenly
decided to introduce several conflicting provisions to abolish constructive notice. Almost, as if
giving a second thought, the English parliament never brought Section 711A into force or there
might have been Himalayan difficulties in interpretation and application of this provision that bit on
its own tail.
Contract this common law muddle with the Indian law, where the Companies act 1913 expressly
endorsed the indoor management rule. Later, although the 1956 act did not contain any such
analogous principles, the Indian law seems to treat the directors as fiduciaries or trustees of the
company and so long as their acts are benefitting the company, they bind the company. This
principal is further enforced by the provisions of the Indian Contract act, related to agency, wherein
it was held that agents power is to do anything lawful to achieve the object of agency and also that
agents can do any legal thing they like, if there is an emergency, to prevent losses to the principle.
Thus, except for a rare breed of cases where constructive notice was applied, Indian courts have
been immune to useless complications in the form of constructive notice and consequently Indoor
management.

BIBLIOGRAPHY
Table of Books:
st

1. Boyle and Birds Company Law, (1 Indian Reprint, 1997)


th

2. Bowstead and Renolds on Agency, (F.M.B. Reynolds ed., 16 Edn., 2001)


th

3. Gower and Davies Principles of Company law (8 edn., Paul L. Davies ed., 2008)
st

4. Palmers Company Law, (21 Edn., C.M. Schmitthoff & J.H. Thomson eds., 1968)
5. Robert R. Pennington, COMPANY

LAW,

th

(8 edn., 2001)

6.Dr.T.S Tripathi, Mordern Company law,

Table of Articles
1. I.D. Campbell, Cntract with companies: II The Indoor Management Rule, Vol.
76, LAW QUARTERLY REVIEW, 115 (January 1960).
2.

Krishnayen

Sen,

Rule of Constructive notice Vis--vis the Doctrine of

Indoor Management, Vol.11, COMPANY


3.

LAW

CASES, 732 (2003).

J.S. McLennan, Demise of Constructive Notice Doctrine in England, Vol. 103,

SOUTH AFRICAN LAW JOURNAL, 558 (1986)


4. J.L. Montrose, the Apparent Authority on an Agent of a Company, Vol. 50,
Law Quarterly Review, 224 (1934).