Doctrine of Constructive Notice

This doctrine provides that persons dealing with a company are deemed to have knowledge of whatever is contained in the company's constitution and other public documents of the company, especially as it relates to the powers, functions and duties of the companys directors. The basis of this imputation is that these are public documents and therefore open to inspection by anybody. The doctrine operates on the assumption that people doing business with a company will be sufficiently motivated to check the company's constitution or other public documents to ensure that the transaction they are entering into is not only allowed but to determine whether there are any internal formalities that must be complied with. The end result of the doctrine of constructive notice is that an individual or juristic entity that deals with a company is presumed to be informed of any required internal formalities or constraints prescribed by the company's public documents, mainly the constitution, relating to the transaction and the authority of the person representing the company in the transaction. The individual or entity is thus prohibited from denying knowledge of the formalities or constraints. The built in proviso to the doctrine, as held in Central Merchant Bank Ltd v Oranje Benefit Society 1975 4 SA 588, is that a company that fraudulently misleads a person into contracting with it on the basis that its directors or agents have the necessary authority to do so, cannot then use the doctrine as a defence in a subsequent delictual claim against the company by alleging that the directors did not have the necessary authority to transact and that the claimant had constructive knowledge of this fact. The doctrine of constructive notice is mitigated by the rule developed in the English case of Royal British Bank v Turquand 1856 119 ER 886. In this case the rule, known as the Turquand rule, was put forward as being that although a person dealing with a company has constructive notice of all the internal formalities required by the company's constitution with regards to the transaction, the person does not have constructive knowledge of whether the internal formalities have been complied with and the person is not obliged to enquire if the formalities have been complied with. The effect of the rule is that where a party completes a transaction with a company and the transaction is deemed void due to the fact that the person representing the company lacked authority and the only reason the representative lacked authority was due to non-compliance with an internal formality, the company may still be held liable and may not rely on the doctrine of constructive knowledge. The Turquand Rule only applies where the persons purporting to act for the company holds the positions they purport to hold either de facto or de jure and the other party was transacting with the company in good faith.

Doctrine of indoor management

The doctrine of indoor management is an exception to the rule of constructive notice. It imposes an important limitation on the doctrine of constructive notice. According to this doctrine "persons dealing with the company are entitled to presume that internal requirements prescribed in memorandum and articles have been properly observed". A transaction has two aspects, namely, substantive and procedural. An outsider dealing with the company can only find out the substantive aspect by reading the memorandum and articles. Even though he may find out the procedural aspect, he cannot find out whether the procedure has been

followed or not. For example, a company may have borrowing powers by passing a resolution according to its memorandum and articles. An outsider can only found out the borrowing powers of the company. But he cannot find out whether the resolution has in fact been passed or not. The outsiders dealing with the company are presumed to have read and understood the memorandum and articles and to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the memorandum and articles. They can presume that all is being done regularly. The doctrine of indoor management is also known as the TURQUAND rule. The rule is based on public convenience and justice and the following obvious reasons: 1. The internal procedure is not a matter of public knowledge. An outsider is presumed to know the constitution of a company, but not what may or may not have taken place within the doors that are closed to him. 2. The lot of creditors of a limited company is not a particularly happy one; it would be unhappier still if the company could escape liability by denying the authority of officials to act on its behalf.

Exceptions to the doctrine of indoor management: 1. Knowledge of irregularity: when a person dealing with a company has actual or constructive notice of the irregularity as regards internal management, he cannot claim benefit under the rule of indoor management. He may in some cases, be himself a part of the internal procedure. The rule is based on common sense and any other rule would encourage ignorance and condone dereliction of duty. 2. Negligence: where a person dealing with a company could discover the irregularity if he had made proper inquiries, he cannot claim the benefit of the rule of indoor management. The protection of the rule is also not available where the circumstances surrounding the contract are so suspicious as to invite inquiry, and the outsider dealing with the company does not make proper inquiry. If, for example, an officer of a company purports to act outside the scope of his apparent authority, suspicion should arise and the outsider should make proper inquiry before entering into a contract with the company. 3. Forgery: the rule in turquand's case does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers. 4. Acts outside the scope of apparent authority: if an officer of a company enters into a contract with a third party and if the act of the officer is beyond the scope of his authority, the company is not bound. In such a case, the plaintiff cannot claim the protection of the rule of indoor management simply because under the articles the power to do the act could have been delegated to him. The plaintiff can sue the company only if the power to act has in fact been delegated to the officer with whom he entered into the contract. Conclusion Thus the doctrine of indoor management seeks to protect the interest of the shareholders who are in minority or who remains in dark about whether the working of the internal affairs of the company are being carried out in accordance with the memorandum and articles. It lays down that persons dealing with a company having satisfied themselves that the proposed transaction is not in its nature inconsistent with the memorandum and articles, are not bound to inquire the regularity of any internal proceeding.