Constructive Criticism. The Word “Constructive” Synonyms: Antonyms:
Constructive Notice and Doctrine of Indoor Management
Transcript of Constructive Notice and Doctrine of Indoor Management
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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
2!2"#
Damodaram Sanjivayya National law University
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AC%&'(L)D*M)&+
I would like to e,-ress my s-ecial a--reciation and thanks to my adisor/ my
Faculty / who has 0een a tremendous mentor for me. I would like to thank you for
encoura$in$ my research/ adice for the research has 0een -riceless.
I would e,tend my thanks to the 1niersity Authorities/ for -roidin$ me with is
o--ortunity to su0mit my -roect. I am inde0ted to all those who hae hel-ed me
in deelo-in$ this -roect for their su$$estion and $uidance.
Permanika Chuckal
2!2"#
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#able of Contents
Serial
&o.
+o-ic Pa$e &o.
!. List of Cases 3
2. Introduction #
4. Constructie notice 5
3. Statutory 6eform and Constructie &otice "
# )ffects 7
i 1ltra Vires Acts 7
ii Acts 0eyond the authority of directores 8
iii Inconsistent A$reements 8
5. Doctrine of Indoor Mana$ement !
". ),ce-tions to doctrine of indoor mana$ement !3
7. Conclusion 2!
8. 9i0lio$ra-hy 22
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%ist of Cases
• Mahony v. East Holyford Mining Co. :!7"#; L.6. 5 F+.L. 758.
• Kotla Venkata Swami V. Ram Murthi, A.I.6. !843 Mad. #"8.
• TC !td. "ray, !87# !875 .9. #38
• Re, Ham'shire !and Co :!785; 2 Ch. "34
• .!. -nderwood !td. v. ank of !iver'ool :!823; ! %9. ""#.
• Kredit ank Cassel v. S$henkers !td ./ :!82"; %9. 725
• nand ihari !al v. #inshaw Co A.I.6. !832 'udh. 3!"
• Ro/en v. "reat (ingall Consolidated :!85; A.C. 348.
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Introduction
+his Proect is an analysis of the Doctrines of Constructie &otice and Indoor
&otification. +his -roect deles into the nature of the Doctrine of Constructie
notice to understand its im-lications on the commercial world. Doctrine of
Constructie &otice was introduced in the earliest days of the modern
com-anies law. At that time/ the conce-t of limited lia0ility was not yet 0orn and
the insecurity -osed 0y this doctrine to the creditor/ was 0alanced 0y the risk of
the shareholders in incurrin$ unlimited lia0ility. ?oweer/ with the arrial of
Limited lia0ility/ the udiciary constantly has tried to 0y-ass or do way with this
doctrine com-letely.
Constructie notice is the le$al fiction that si$nifies that a -erson or entity
should hae known/ as a reasona0le -erson would hae/ een if they hae no
actual knowled$e of it. For e,am-le/ if it is not -ossi0le to sere notice
-ersonally then a summons may 0e -osted on a court house 0ulletin 0oard or
le$ally adertised in an a--roed news-a-er. +he -erson is considered to hae
receied notice een if they were not aware of it.
In com-anies law the doctrine of constructie notice is a doctrine where all
-ersons dealin$ with a com-any are deemed to hae knowled$e of the
com-any@s articles of association and memorandum of association. +he doctrine
of indoor mana$ement is an e,ce-tion to this rule. In India the rule was neer
too strictly a--lied 0ut continues to -ersist.
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Constructive Notice
After 0ein$ re$istered with the 6e$istrar of Com-anies/ the memoranda and
articles 0ecome -u0lic documents and may 0e ins-ected 0y any on -ayment of the
-rescri0ed fee. 'n account of it/ eery -erson dealin$ with the com-any ise,-ected to hae read and understood the Contents of the documents 0efore
makin$ any contract with the com-any and if he does not he will hae to 0ear its
conseuences. +hus/ a -erson dealin$ with a re$istered com-any is -resumed not
only to hae read the -u0lic document like memorandum/ articles and other
re$ulations which form the constitution of the com-any 0ut also to hae
understood them accordin$ to their -ro-er meanin$.! (hether he has read these
documents or not/ he is -resumed to hae notice of their contents.2
In the case of Mahony v. East Holyford Mining Co.4 Lord ?ather0y said B)ery
oint stock com-any has its memorandum and articles association o-en to all who
are minded to hae any dealin$s whatsoeer with the com-any/ and those who so
deal with them must 0e effected with notice of all that is contained in those two
documents.
It is to 0e noted that a -erson dealin$ with a re$istered com-any is -resumed not
only to hae the notice of the com-anys -owers 0ut also the Powers of its
officers.3
It is also nota0le that such -resum-tion cannot 0e inferred in res-ect of all kinds
of documents/ re$istered with the com-anyE for the -ur-ose such documents may
0e diided into two $rou-s
:a; the documents affectin$ the -owers of the com-any and its a$ents/ and
:0; other documents/ i.e./ the documents not affectin$ the -owers to the
com-any and its a$ents.
A -erson dealin$ with a re$istered com-any is -resumed to hae read and
understood the -u0lic documents affectin$ the -owers of the com-any and its
!*riffith . Pa$et/ 5 Ch. D. #!" 'ak0ank 'il Co. . Crum/ 7 A--. Cas. 5#E *.I. = C. Com-any/L.6. " ). 28E Country *loucester 9ank . 6udry/ etc. Co./ :!78#; ! Ch. 528E 'wen andAshworths Claim/ :!8!; Ch. !!#
2 %redt 9ank Cassed . henkers/ :!82"; ! %.9. 725.
4 :!7"#; L.6. 5 F+.L. 758.
3 9aron Parke in 6idely . Portsmouth *rindin$ Ch./ :!737; 2 ),. Ch. "!!.
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officers/ e.$. memorandum/ articles and s-ecial resolution/ etc/ # 0ut cannot 0e
-resumed to hae read and understood the documents not affectin$ the -owers of
the com-any and its officers/ e.$./ 0alance sheet/ accounts and return etc. 5
An a--lication of the doctrine of constructie notice is found in the case of Kotla
Venkata Swami V. Ram Murthi/" also. In this case/ the articles reuired all the
deeds to 0e si$ned 0y the mana$in$ director/ the secretary and a workin$ director
on 0ehalf of the com-any 0ut a deed of mort$a$e was sin$ed only 0y the secretary
and a workin$ director and the deed was acce-ted 0y the -laintiff. +he -laintiff
was not entitled to enforce it 0ecause if she :the -laintiff; had read the articles/ she
would hae discoered that a deed such as she took reuired e,ecution 0y three
s-ecified officers of the com-any and would hae refrained from acce-tin$ a deed
inadeuately si$ned.
Statutory reform and Constructive notice
In the o-inion of some le$al e,-erts the doctrine of constructie notice is
considered as an unreal doctrine. +his doctrine is not 0ased on realities of 0usiness
of life. A com-any is known to the -u0lic at lar$e throu$h its officers and not
throu$h its Memorandum and Articles of Association. +he doctrine of constructie
notice has 0een a0olished 0y Section 8 of the )uro-ean Communities Act/ !8"2.
?oweer/ Section 8 of the said Act is now incor-orated in Section 4# of the
:)n$lish; Com-anies Act/ !87#. +he effect of new Proision has 0een shown in
TC !td. "ray.0(here a de0enture issued 0y a com-any was not si$ned 0y the
director -ersonally as reuired 0y the terms of Articles/ in fact it was si$ned 0y a
solicitor as attorney of a director. +he Articles of com-any contains the -roision
that Beery instrument to which the seal shall 0e affi,ed shall 0e si$ned 0y a
director. It was held that een so the com-any was held lia0le. +he Court while
considerin$ the effect of new -roision said that 0efore this enactment was
# After 0ein$ re$istered with the 6e$istrar/ a s-ecial resolution 0ecomes a -u0lic
document affectin$ the -owers of the com-any and its officers
5 +hey are filed with the 6e$istrar only for record and their -ur-ose is merely to
-roide information of the financial -osition of the com-any
" A.I.6. !843 Mad. #"8.
7 Financial +imes/ &o. 2"/ !87# !875
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enforced a -erson dealin$ with the com-any was reuired to $o throu$h the
Memorandum and Articles of the com-any to satisfy himself that the transaction
was within the cor-orate ca-acity/ 0ut the scenario has 0een chan$ed 0y irtue of
Section 8:!;. +his Section 8:!; states that $ood faith is to 0e -resumed and that the
-erson dealin$ with the com-any is not 0ound to enuire.
+he doctrine of constructie notice has not 0een taken so seriously 0y the
courts in India. For illustration/ in #ehradun Mussouri Ele$tri$ Tramway Co. v.
%agrnandardas/8 as -er articles/ the directors could dele$ate all their -owers
e,ce-t the -ower to 0orrow. )en so an oerdraft taken 0y the mana$in$ a$ents
without a--roal of the 0oard was herd to 0e 0indin$. +he Allaha0ad ?i$h Court
said that such tem-orary loans must 0e ke-t 0eyond the sco-e of releant
-roision.
*ffects.G+he effect of the doctrine of constructie notice may 0e summed u- as
follows
!. Ultra +ires ,cts :-
Accordin$ to the doctrine of constructie notice/ eery -erson dealin$ with the
com-any is -resumed to hae the knowled$e of the contents of memorandum and
therefore if an act is ultra ires the com-any/ he cannot claim relief on the $round
that he was unaware of the fact that the act is 0eyond the memorandum :i.e./ ultra
ires the com-any;. In )n$land/ S. 8:!; of the )uro-ean Communities Act/ !8"2/
has chan$ed the -osition with effect from !G!G!8"4 to the effect that a transaction
which is ultra ires the com-any will 0e H0indin$ on the com-any and the
com-any cannot -lead that it has acted ultra ires or the transaction is ultra ires
-roided the outsider dealin$ with the com-any has acted in $ood faith and the
transaction has 0een decided u-on 0y the com-anys 0oard of directors. ?oweer/
there is no such le$islation in India and conseuently in India/ the outsider dealin$
with the com-any is -resumed to hae the knowled$e of the contents of the
memorandum and therefore if an act is found to 0e ultra ires/ he cannot claim
relief on the $round that he had no knowled$e that the act was 0eyond the
memorandum and/ therefore/ ultra ires.
8 A.I.6. !842 All. !3!E See also Charnock Collieries Ltd. . 9holanath/ I.L.6.
:!8!2; 48 Cal. 7! arid Pro0odh Chandra . 6oad 'ils :India; Ltd./ I.L.6/. :!828;#" Cal. !!!
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"/ ,cts beyond t0e aut0ority of directors/1
If this lack of authority of the directors or other a$ents of the com-any is eident
from the -u0lic documents like articles and other re$ulations/ the -erson dealin$
with the com-any will 0e -resumed to hae the notice of the lack of authority and
therefore he cannot hold the com-any 0ound 0y the act of the directors :or other
a$ents;. For e,am-le/ if the articles reuire a 0ill to 0e si$ned 0y two directors/ a
-erson dealin$ with the com-any is under duty to see that it has 0een si$ned 0y
the two directors/ otherwise he cannot enforce the 0ill a$ainst the com-any. 9ut if
the lack of authority of the directors or a$ents is not eident from the -u0lic
documents/ he cannot 0e -resumed to hae the notice of the lack of authority and
therefore he can hold the com-any 0ound 0y the act of the directors or other
a$ents if he honestly thinks that the director or a$ent with whom he is ne$otiatin$
is authoried to act on 0ehalf of the com-any. For e,am-le/ where the articles
reuire the directors to take the consent of the shareholders 0y ordinary resolution
for e,ercisin$ thereof 0orrowin$ -owers 0ut they 0orrow money without takin$
such consent the 0orrowin$ will 0e 0indin$ on the com-any if the creditor has no
notice of the fact the directors ne$otiatin$ with him hae not taken such consent.
4.Inconsistent agreements G
Person dealin$ with the com-any is -resumed to hae the notice of the contents of
articles and conseuently he cannot make a contract with the com-any which
-ur-orts to oerride any ri$hts created 0y the articles.
+he doctrine of constructie notice -rotects the com-any 0ut not the outsiders
dealin$ with the com-any. Sometimes the doctrine creates much hardshi-s for the
outsiders. +hey are -resumed to hae the knowled$e of the -u0lic documents like
the memorandum of the com-any 0ut in -ractice it is ery difficult and time
consumin$ to hae the com-lete knowled$e of them 0efore makin$ any contract
with the com-any. +hus/ the doctrine is inconenient and unreal. It has failed to
take note of the realities of 0usiness life. 'n account of its eils the doctrine has
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not 0een taken seriously 0oth in 1.%. and India !. In )n$land the doctrine has
0een a0ro$ated 0y the )uro-ean Communities Act. !88". !!
+he doctrine of constructie notice is su0ect to the followin$ doctrines
I. Doctrine of Indoor Mana$ement
II. Doctrine of ?oldin$ out
I/ Doctrine of Indoor Management"
+he doctrine of constructie notice is su0ect to the doctrine of indoor
mana$ement. Accordin$ to the doctrine of indoor mana$ement/ an outsider
dealin$ with the com-any is reuired to see that the authority of dealin$ had 0een
$ien 0y the articles to the -erson with whom the outsider is dealin$ 0ut he cannot
0e assumed to do anymoreE he is not e,-ected to enuire whether the -ro-er
-rocedure has 0een followed for the dele$ation of the authority to the -erson with
whom the outsider is dealin$E!4 he may 0e -resumed to hae the knowled$e of the
constitution of the com-any 0ut not what may or may not hae taken -lace within
indoors which are closed to him.!3 +he doctrine entitles the outsider dealin$ with
the com-any to assume that the thin$s hae 0een done in accordance with the
-roisions and -roceedin$s stated in the articles. +hus/ eery outsider is entitled to
assume the re$ularity of internal -roceedin$s unless he has the knowled$e of the
irre$ularity. +he doctrine im-lies res-onsi0ility on the -erson in char$e on the
mana$ement of the com-any to see that all the rules of internal mana$ement of a
com-any are com-lied with and the com-any will he lia0le to the outsider for the
ac of his directors or a$ents een if the internal formalities or internal -rocedures
hae not 0een com-lied with. An e,am-le will make the -oint more clear. If the
! Dehra Dun Mussoorie )lectric +ramway Co. V.
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articles $ie -ower to the mana$in$ a$ent of the com-any to 0orrow money with
the a--roal of directors 0ut the mana$in$ a$ent 0orrows without such a--roal/
the lender will not 0e affected 0y such irre$ularity/ he may -resume that 0efore
0orrowin$/ the mana$in$ a$ent has taken the a--roal of the directors and
conseuently the com-any will 0e 0ound 0y the loan. ?oweer/ if the lender has
the knowled$e of the irre$ularity/ the -osition would 0e uite different. +he lender
will not 0e -rotected the -osition would 0e uite different. +he lender will not 0e
-rotected and conseuently the loan will not 0e 0indin$ on the com-any.!#
+he o0ect of this doctrine is to -rotect the outsider with a com-any. +he
doctrine is 0ased on 0usiness conenience for 0usiness could not 0e carried on if
eery0ody dealin$ with the a--arent a$ents of a Com-any was com-elled to call
for eidence that all internal re$ulations had 0een duly o0sered.!5Since
memorandum and articles are -u0lic documents o-en to -u0lic ins-ection/ an
outsider is -resumed to hae the knowled$e of their contents/ 0ut the details of
internal -rocedure are not o-en to -u0lic ins-ection and therefore it would 0e
unfair if an outsider dealin$ with the Com-any is -resumed to hae the knowled$e
of the details of internal -rocedure :i.e. the rules of internal mana$ement;.
+he doctrine was first deelo-ed in the case of Royal ritish ank v.
Tur&uand.12 +he doctrine of indoor mana$ement is also known as rule in
+uruands case. In this case/ the directors were em-owered 0y its re$istered deed
of settlement!7 to 0orrow on 0ond such sums as should 0e authoried 0y a $eneral
resolution -assed at $eneral meetin$ of the com-any. +he com-any 0orrowed
money and issued a 0ond si$ned 0y two directors under the seal of the com-any.
(hen the lender sued on the 0ond/ the com-any contended that there had 0een no
resolution authoriin$ the loan and therefore the 0ond was $ien without authority
:i.e./ the 0orrowin$ was unauthoried; and conseuently it was not 0indin$ on the
com-any. +he Court reected the contention of the com-any and held the com-any
0ound 0y the loan :or 0ond;. ?ain$ ascertained that 0orrowin$ mi$ht 0e
!# 9alasara (athi Ltd. V. A. Parmeshwar/ A.L6. !8#" Mad. !22.
!5 Palmers Com-any Law/ P. 45.
!" :!7#5; 5 ).P. = 9. 42".
!7 1ntil !752 memorandum and articles were found in one document called theBdeed of confinement
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authoried 0y a resolution of the com-any/ the -laintiff :the lender; had ri$ht to
assume that the necessary resolution had 0een -assed. +he doctrine of indoor
mana$ement deelo-ed in the case of Royal ank v. Tur&uand is 0ased on reason
and ustice. It has 0een a--lied 0y the courts in a num0er cases to secure ustice.
+he cases in which the doctrine has 0een a--lied may discussed under the
followin$ heads.!8
4a5 Cases where directors title to office is defectie
Any transaction entered into or act done on 0ehalf of com-any 0e de facto
directors will 0e 0indin$ on the com-any een thou$h a--ointment of such
directors is found defectie -roided the outsider dealin$ with the com-any has no
knowled$e of it 0ecause the outsider is entitled to -resume that the directors
dealin$ with him hae 0een -ro-erly a--ointed.2 )en if de facto directors hae
neer 0een a--ointed2! their act done on 0ehalf of the com-any will 0e 0indin$ on
the com-any if they are in control of 0usiness of the com-any and the outsider is
unaware of the fact that the director hae 0een a--ointed.22
4b5 Failure to hold -ro-erly conened meetin$s
Directors are reuired to e,ercise their -ower collectiely 0y resolin$ at -ro-erly
conened meetin$s of the 0oard of directors that acts shall 0e done in the name of
!8 Pennin$tons Com-any Law :+hird )d.; P. !!3
2 Sec Pudurnec = Co. / Moos/ A.I.6. !825 9om. 27E P.C. Mitra . 6oad 'il
:India; Ltd./ :!828; I.I..6. #" Cal. !!!2! Muhni . Iast
*aluniinco./:!8!; 2 %.9. 4!3E 6e/ Country Lift Assurance Co./ :!7"; . S Ch. A--.
277E Im-erial 'il and
*eneral Mills . (ain Sin$h/ A.I.6. !8l# Lah. 3"7E Sree Minakshi Mills . Callianee/ A.I.6.
!84# Mad/. "88.
22 Sec Mahony . )ast ?olyford Minin$ Co./ :!7"#; L.6. " ?.L. 758. For critical
study of Indian cases/ see P.S.. San$al 6oyal 9ritish flunk V. +uruand and IndianLaw :!853; ! Com-. L.6. !!".
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the com-any. 9ut sometimes it is found that a transaction entered into 0y one or
some of the directors in the name of the com-any has not 0een a--roed 0y a
resolution -assed at a re$ularly conened 0oard meetin$. (e will consider here
the fate of such transaction.
In short the -osition of law a--ears to 0e that the act done on 0ehalf of com-any
0y the directors will 0e 0indin$ on the com-any een if the meetin$ of the 9oard
was irre$ular as no -resent or -ro-er notice of the meetin$ of the 0oard was $ien
in adance to each director/24 -roided the outsider dealin$ with the com-any is
still -rotected 0ecause he is -resumed to hae the knowled$e of the num0er of
directors who from uorum/ 0ut he is not reuired to see that the num0er of
directors in fact attended the 0oard meetin$23 and this is lo$ical 0ecause een
thou$h the outsider knows what num0er of directors should attend he had so
means of ensurin$ that num0er actually did attend.2#
Similarly an act done 0y the directors in the name of the com-any will 0e 0indin$
on the com-any een if the act has 0een done without a 0oard meetin$ 0ein$ held
at all/ -roided the outsider dealin$ with the com-any has no knowled$e of it.25 Its
reason is that the outsider has no means to discoer whether a 0oard meetin$ has
0een -ro-erly held. +hus a de0enture/ which was issued under the seal of the
com-any/ was held 0indin$ on the com-any/ een thou$h no 0oard meetin$ to
sanction its issue was held at all.
4c5 Disre$ard of limitations on the directors authority 2"
+he doctrine of indoor mana$ement also -rotects an outsider dealin$ with the
com-any in a condition where the directors hae authority under the
memorandum and articles of the com-any with the limitation that they should
24 9rotone . La +rinidad/ :!77"; 4" Ch. D. !
23 Prince of (ales Assurance Society V. Athenaeum Assurance Society/ :!7#7; 4
C.9.&.S. "#5/ Dais . 6. 9oltom = Co./ :!783; 4 Ch. 5"7.
2# Pennin$ton/ HCom-any Law/ :+hird edn.; -. !!7
25 Dais . 9oltom = Co. :!783;/ 4 Ch. 5"7 Duck V. +owerin$ *alaniin$ Co.
:!8!; 2 %9. 4!3.
2" For detailed study/ see P.S. San$al/ 6oyal 9ritish 9ank / +hruand = Indian
Law/ :!853; 2 Com-. L.
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e,ercise their authority if certain conditions are fulfilled or a s-ecial -rocedure is
followed 0ut they e,ercise their authority without fulfillin$ the conditions or
followin$ the s-ecific -rocedure. In other words/ the act done 0y the directors who
hae authority to do the act after fulfillin$ certain conditions or followin$ a
s-ecific -rocedure will 0e 0indin$ on the com-any een if the conditions hae
not fulfilled or the -rocedure has not 0een followed/ -roided the outsider has o
knowled$e of the fact that the conditions hae not 0een fulfilled or the -rocedure
has not 0een followed. Its reason is that the outsider may 0e -resumed to hae
knowled$e of the conditions reuired to 0e fulfilled or -rocedure reuired to 0e
followed 0efore the e,ercise of the -ower 0ut he cannot 0e -resumed to hae
wlcd$e of the fact that the conditions hae not 0een fulfilled or the -rocedure has
not 0een followed. ?e has no means of knowin$ that the conditions or -rocedure
-rescri0ed 0y the memorandum or articles hae actually 0een adhered or not. +he
0est illustration is found in +uruands case which facts hae 0een stated a0oe.
In Ham'shire !and Co.27/ it has 0een held that if the directors hae authority to
0orrow money on 0ehalf of the com-any u- to a certain limit s-ecified in the
articles and also in e,cess of the limit if a $eneral meetin$ of the com-any
consents/ the 0orrowin$ in e,cess of the s-ecified limit will 0e on the com-any
een if the necessary consent has not 0een taken -roided the lender is unaware of
the fact that the necessary consent has not 0een taken. Its reason is that the lender
is entitled to assume that the necessary consent has 0een taken 0efore the
0orrowin$ in e,cess of the limit.
In ritish Thomson Houstom Com'any !td. v. (ederal Euro'ean ank !td .28/ 0y
articles/ the directors were em-owered to dele$ate one or more or their own 0ody
such of the -owers conferred on the directors as they consider reuisite for
carryin$ on 0usiness of the com-any and to determine who should 0e entitled to
si$n on the com-anys 0ehalf 0ills/ recei-ts/ acce-tances/ contracts and
documents. &. Pal/ one of the directors/ e,ecuted a $uarantee. +he com-any
contended that the director had no authority to e,ecute the $uarantee and therefore
27 :!785; 2 Ch. "34.
28 :!842; 2 %.9.""E See also Dey . -ullin$er )n$ineerin$ Co./ :!82; ! %.9. ""/
9i$$er Staff . 6owatts (arJ Ltd./ :!785; 2 Ch. 84E Mercanfile 9ank of India .
Chartered 9ank of India/ Australia and China and Strauss = Co./ :!8"4; ! All ).24!.
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it was not 0ound 0y it. +he Court held that the com-any was lia0le on the
$uarantee 0ecause the -laintiff was entitled to assume that &. Pal had 0een
authoried 0y the directors to si$n a contract on 0ehalf of the com-any.
*6ce7tions to t0e doctrine of indoor management
+he doctrine of indoor mana$ement or rule in +uruaflds case does not a--ly in
the conditions mentioned 0elow
/ Notice of irregularity:
+he doctrine of indoor mana$ement or the rule of +uruands case does not a--ly
if the -arty affected 0y an irre$ularity may 0e taken to hae ow!ed$e of suchirre$ularity if he was himself a -arty to the internal mana$ement.
In Howard v. )atent *vory Manufa$turing Co34. the articles em-owered the
directors to hotGrow u- to -ounds ! and such further sums as the $eneral
meetin$ mi$ht authorie. +he com-any 0orrowed -ounds 4/# from the directors
without the authority of the $eneral meetin$ and issued de0entures to them. +he
Court held that the de0entures were alid to the e,tent of -ounds ! only. Since
the directors were themseles -arty to the internal -roceedin$s they were taken to
hae the notice of the fact that the necessary resolution had not 0een -assed and
therefore they could not 0e -rotected 0y the rule in +uruand@s case :or the
doctrine of indoor mana$ement;.
?oweer/ in Hely+Hut$lunson V. rayhead !td .4! the a0oe men -rinci-le/ that a
-erson who is a -arty to the internal mana$ement will 0e deemed to hae the
knowled$e of the irre$ularity of internal -roceedin$s :if any;/ has not 0een strictly
followed. +he Court held that a -erson cannot 0e deemed to hae the knowled$e
of the irre$ularities of internal mana$ement merely 0ecause he is a director and
conseuently a -art of the internal machinery.
?oweer/ the iew that a -erson who is himself a -art of internal/
machinery should 0e deemed to hae knowled$e of the irre$ularity of internal
mana$ement a--ears to 0e more correct and -ractical.
4 :!777; 47 Ch. P. !#5E See also +yne Mutual Steamshi- Insurance Association
. 9rown/ :!785; "3 L.+. 274E Morris . %ansen/ :!835; A.C. 3#8.
4! :!855; ! >.9. #38.
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+he -rinci-le that a -erson dealin$ with the com-any will not 0e -rote!
he has knowled$e of the irre$ularity/ is not confined only to -ersons dealin$ with
the com-any 0ut e,tend to the cases where one com-any has dealin$ with another
com-any. +hus/ where a com-any dealin$ with another com-any affected 0y the
irre$ularity in the internal mana$ement of the other com-any/ it cannot 0e
-rotected under the rule in +uritands case if it had notice of the
irre$ularity.42'rdinarily/ a com-any is not automatically deemed to hae the
knowled$e of the irre$ularity in the internal mana$ement of the com-any with
which it is dealin$ merely 0ecause it has a common officer :as director or
secretary; with that other com-any/ 0ut the com-any may 0e -resumed to hae the
knowled$e of the irre$ularity if the common officer had some duty im-osed u-on
him to communicate the knowled$e to the other com-any/ and had some duty
im-osed u-on him 0y the com-any which is alle$ed to 0e affected 0y the notice to
receie the notice.44
In Re, Ham'shire !and Co35. , the directors of a com-any were em-owered
to 0orrow money on 0ehalf of the com-any 0ut not 0eyond a certain limit without
the consent of a $eneral meetin$. +he directors 0orrowed 0eyond this limit and a
$eneral meetin$ $ae the reuired consent/ 0ut the notice summonin$ the meetin$
did not state that the 0orrowin$ to 0e authoried was 0eyond the limit. +he
secretary of the com-any 0orrowin$ the loan was also the secretary of the society
lendin$ the com-any and he knew of the irre$ularity. +he Court held that the
knowled$e acuired 0y the secretary as officer of the com-any could not 0e
im-uted to the Society 0ecause he was under no duty to communicate it to the
society and no duty was im-osed on him 0y that society to receie it. +hus/ the
0orrowin$ was 0indin$ on the recoer it com-any and society :lender; was
entitled to recoer it.
42 +.6. Pratt Ltd. . Sasson = Co. Ltd./ 4" 9orn. L.6. 8"7.
44 6e/ Marseilles ),tension 6ly./ :!8"!; L.6. " Ch. i5iE *ale . Lewis/ 8 >.9. "4 6e/
?am-shireLand Co./ :!785; 2 Ch. "34E Koun$ . Daid Payne = Co./ :!73; 2 C% 57E
6e/ Fenwick Sto0art
= Co./ :!88; ! Ch. #5.
43 :!785; 2 Ch. "34E See also Fenwick/ Sto0art = Co. Ltd./ :!82; ! Ch. #5
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"/ Sus7icious circumstances inviting in8uiry:
+he doctrine of indoor mana$ement does not a--ly where the -erson
seekin$ to rely on it is -ut on inuiry in circumstances under which he would hae
discoered the irre$ularity if he had made inuiries.
In .!. -nderwood !td. v. ank of !iver'ool /4# a sole director of a
com-any -aid into his own account cheues drawn in faour of the com-anyE the
0ank collected the cheues and credited him with the -roceeds. +he 0ank was
sued 0y the com-any on 0ehalf of a de0entureGholder claimin$ dama$es for
conersion. +he 0ank was held lia0le and it was not -rotected under the rule in
+uruafldS case 0ecause the fact that the director had -aid the cheues drawn in
faour of the com-any into his -riate account was so unusual to -ut the 0ank on
inuiry and the 0ank was ne$li$ent in failin$ to make -ro-er inuiries.
It is nota0le that if the act of an officer of a com-any is such as would
ordinarily 0e 0eyond the -owers of such officers/ the act will not 0e 0indin$ on the
com-any merely 0ecause under the articles of the com-any/ -ower to do the act
could hae 0een dele$ated to him. +he fact that the act is 0eyond the a--arent
authority of such officers is sufficient to -ut the -laintiff on inuiry to ascertain
whether the officer has in fact 0een $ien the authority to do the act. in such a
case/ the act will 0e 0indin$ on the com-any only if the -ower to do the act has
actually 0een dele$ated to the officer/ i.e./ if the officer has actual authority to do
the act on 0ehalf of the com-any.
In Kredit ank Cassel v. S$henkers !td ./45 certain 0ills of e,chan$e were
drawn in the name of the defendant com-any :who were forwardin$ a$ents; 0y its
0ranch mana$er who had the authority to draw 0ills on 0ehalf of the com-any. +he
0ills so drawn were not 0indin$ on the defendant com-any 0ecause the drawin$ of
0ills was not within the a--arent or ostensi0le authority of the 0ranch mana$er
and conseuently the -laintiff was under duty to inuire as to the authority of the
0ranch mana$er to draw the 0ills on 0ehalf of the defendant com-any. +he
defendant com-any would hae 0een 0ound if it 0ad $ien him actual authority to
4# :!823; ! %9. ""#.
45 :!82"; %9. 725.
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draw 0ills on its 0ehalf 0ut in this case/ no such authority was $ien to the 0ranch
mana$er and conseuently the defendant com-any was not lia0le on the 0ills.
Similarly/ in nand ihari !al v. #inshaw Co.32 an accountant of the
com-any without authority transferred the -ro-erty of the com-any to the
-laintiff. +he transfer was held to 0e oid for it is not within the a--arent authority
of the accountant to transfer the -ro-erty of the com-any. +he transfer would hae
0een the defendant com-any f it had $ien the accountant actual authority to
transfer its -ro-erty 0ut since no such authority was $ien to the accountant the
transfer was not 0indin$ on the com-any.
$/ 9orgery:
+he doctrine of indoor mana$ement does not a--ly where the act/ done in
the name of the com-any are oid a0 initio. +hus/ if the document on which the
-erson seeks to rely is a for$ery the doctrine of indoor mana$ement will not 0e
a--!ica0le.
In Ro/en v. "reat (ingall Consolidated 30/ the uestion arose whether the com-any
was 0ound 0y a short certificate to which the com-anys seal had 0een affi,ed 0y
the com-any@s secretary without authority and the for$ed si$natures of two
directors were added. In this case/ the share certificate was issued 0y com-anys
secretary who had for$ed the si$natures of two directors and affi,ed the seal of the
com-any without any authority/ It was held that the com-any was not 0ound 0y
the share certificate 0ecause it was for$ed and/ therefore/ a Lord Lore 0urn has
o0sered that the doctrine of indoor mana$ement a--lies only to irre$ularities that
otherwise mi$ht affect a $enuine transaction/ 0ut it cannot a--ly to a for$ery.
?oweer/ a com-any may 0e 0ound een 0y a for$ed document on the
$round of holdin$ out or esto--el. A com-any may 0e esto--ed from relyin$ on
the fact of for$ery if the for$ed document has 0een re-resented as $enuine 0y
officer or a$ent of the com-any hain$ actual or ostensi0le authority to do so.48
+hus as +hom-son has o0sered/ the com-any will 0e 0ound een 0y a for$ed
document if the com-any re-resents that the for$ed instrument is $enuine 0ecause
4" A.I.6. !832 'udh. 3!".
47 :!85; A.C. 348.
48 Sealy/ L.S. Cases and Materials on Com-any Law/ -. 2".
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in such a case it will 0e esto--ed from denyin$ that for$ed instrument is $enuine
as a$ainst an outsider who has relied to his detriment u-on the re-resentation.3
9esides/ a com-any will also 0e 0ound 0y a for$ed document -roided the
outsider -leadin$ esto--el a$ainst the com-any has relied on the for$ers a--arent
authority to e,ecute the instruments. +hus/ where a director who has ostensi0le
authority to 0orrow money under its memorandum and articles commits fraud of
the com-any 0y not -lacin$ the money 0orrowed 0y him on 0ehalf of the
com-any/ the 0orrowin$ will 0e 0indin$ on the com-any -roided the lender is
0ona fide and thus the com-any cannot 0e allowed to refuse the -ayment of the
loan on the $round of the fraud of its own officer .3!
&/ No nowledge of t0e contents of articles :
Sometimes articles contain a Bdele$ation clause -roidin$ that the 0oard of
directors can dele$ate its authority to an indiidual director. If an outsider dealin$
with the com-any has the knowled$e of dele$ation clause/ he may assume that the
-ower of dele$ation has 0een e,ercised and the director enterin$ into contract with
him on 0ehalf of the com-any has 0een dele$ated authority to make such contract.
+he actual dele$ation 0ein$ a matter of internal mana$ement! he is &ot 0ound to
enuiry as to whether the authority has actually 0een dele$ated to the director or
not.32
?oweer/ the most controersial issue is whether an outsider enterin$ into
a contract with an indiidual director -ur-ortin$ to act on 0ehalf of his com-any
without hain$ the knowled$e of such dele$ation clause at the time of makin$
such contract can also assume that the -ower of dele$ation has 0een e,ercised and
the director has 0een dele$ated the authority to make such contract on 0ehalf of
the com-any.
Accordin$ to one iew34 he is not entitled to assume so. For e,am-le/ in the case
of Rama $or'oration v. )roved Tin and "eneral *nvestment Co55./ the of the
defendant com-any contained a Hdele$ation clause -roidin$ that the directors
3 Andrews 6. +hom-son/ Com-any Law Doctrine and the Authority to Contract/
:!8##G#5; !! +oronto Law /
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may dele$ate any of their -owers/ other than the -ower to 0orrow and make calls/
to committees consistin$ of such mem0ers of their 0ody as they think fit. 9ut in
fact the 9oard of Directors had not dele$ated any of their -owers. A director of the
defendant Com-any entered into a contract with the -laintiff com-any to
-artici-ate in a oint enture concernin$ the sale of a tele-hone directory 0ut he
did not disclose to the 9oard anythin$ a0out the contract. +he -laintiff com-any
had no knowled$e of the dele$ation clause at the time when the ntract was
entered into. +he defendant com-any re-udiated the contract. +he -laintiff
com-any tried to enforce the contract on the stren$th of Hdele$ation clause in the
articles of the defendant com-any. +he Court held the -laintiff com-any was not
0ound 0y the a$reement. Since the -laintiff com-any had no knowled$e of the
Hdele$ation clause when the contract was entered into/ it was not entitled to
assume that the -ower of dele$ation had 0een e,ercised and the director enterin$
into the contract had 0een dele$ated an authority to do so. Its reason is that rule in
+uruarids case or the doctrine of indoor mana$ement is 0ased on the -rinci-le of
esto--el and/ therefore/ where a -erson has knowled$e of articles/ he can assume
that the officer o-enly e,ercisin$ the authority has 0een dele$ated such authority
and the com-any can 0e esto--el from alle$in$ that the officer was not in fact so
authorised.3# +he iew does not a--ear to 0e more correct 0ecause an outsider
dealin$ with the com-any is deemed to hae constructie notice of the articles and
also 0ecause een if he had consulted the articles/ he would not 0e a0le to know
whether the director had actually 0een dele$ated the authority.
+he 0etter iew is that if an outsider dealin$ with the com-any entered into
a contract with an indiidual director of the com-any -ur-ortin$ to act on its
0ehalf and the contract is within the a--arent or ostensi0le authority of the
director/ the contract will 0e 0indin$ on the com-any een if the outsider had no
34 ?ou$htion = Co. . &orhard/ Lowe and (ills Ltd./ :!82"; !%9. 235E 6ama
Cor-oration.Proed +in and *eneral Inestment Co./ :!852; 2 >.9. 3"/ +he iew of
Mukeri/
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knowled$e of the articles of the com-any when he contracted with the director/
unless it is -roed that the com-any under its memorandum or articles/ had no
ca-acity either to make such contract or to dele$ate the authority to make such
contract to the director .35
35 9ritish +hom-son ?ouston Co. . Federated )uro-ean 9ank Ltd./ :!842; 2 %
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Conclusion
+he rule of constructie lia0ility is a unrealistic doctrine. It is an ima$inary
doctrine and is a fiction created 0y the udicial -ronouncement of the Courts.
Innumera0le -arties enter into a num0er of contracts in eeryday 0usiness of thecom-any. +his doctrine e,-ects each and eery outsider not only to know the
documents of the com-any 0ut also -resume to understand the e,act nature of
documents/ which is -ractically not -ossi0le. In reality/ the com-any is not known
0y the documents 0ut 0y the -eo-le who re-resent it and deal with an outsider.
+he outsiders do the 0usiness and enter into contracts not always on the 0asis of
documents of the com-any 0ut the $oodwill and the re-utation of the directors or
officers who are re-resentin$ the com-any.
+his is the reason why the 9ritish Courts and Indian Courts hae shifted its
a--roach in dealin$ with the cases relatin$ to the outsider of the com-any. +he
Indian Courts hae not $ien much im-ortance to this doctrine. +he )uro-ean
Communities Act has also a0ro$ated the conce-t of constructie notice 0y
0rin$in$ Section 8 of the Act which reco$nies the conce-t of $ood faith in
0usiness transaction. +his -roision is in the tune of the reality of the 0usiness
transaction/ where the outsiders of the com-any enter into the arious contracts
not on the 0asis of the documents of the com-any 0ut on the $ood faith of the
com-any.
+his is the reason why the courts hae eoled the doctrine of indoor
mana$ement as an o--osite to the doctrine of constructie notice in order to
-rotect the interests of the outsiders.
+he researcher on the 0asis of the arious commentaries on the su0ect and the
cases decided 0y the 9ritish Courts and Indian Courts is of iew that merely
re$istration of a com-any should not constitute the notice of the documents
su0mitted to the re$istrar. Also/ an outsider should always hae the freedom to
make some assum-tion which a reasona0le -erson may infer into the -articular
circumstances.
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;ibliogra70y
#able of ;oos:
!. 9oyle and 9irds Com-any Law/ :!st
Indian 6e-rint/ !88";
2. Dr.S.C +ri-athi/ Modern Com-any law/:!st edition;
4. *ower and Daies Princi-les of Com-any law :7th
edn./ Paul L. Daies
ed./ 27;
3. Palmers Com-any Law/ :2!st
)dn./ C.M. Schmitthoff =
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"& ! P