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1 AUTHOR:
Pranjal Singh
National Law School of India University
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Bhoomija Verma
Id. No 1829
IIIrd year
IIIrd Year
B.A.LL.B.
B.A.LL.B.
(Hons.)
(Hons.)
Table
of
Contents
Table
of
Authorities
..........................................................................................................
3
Introduction
........................................................................................................................
5
Chapter
1:
Doctrine
of
Constructive
Notice
and
Background
............................
6
Chapter
1.1:
Background
to
the
Doctrine
of
Constructive
Notice
..............................
6
Chapter
1.2:
The
Doctrine
of
Constructive
Notice
...........................................................
8
Chapter
1.3:
Problems
with
the
Doctrine
of
Constructive
Notice
..............................
9
Conclusion
.........................................................................................................................
26
Bibliography
.....................................................................................................................
27
Annotated
Bibliography
................................................................................................
28
Table
of
Authorities
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.B. 775.
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.
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.
Introduction
This Research Paper is an analysis of the Doctrines of Constructive Notice and Indoor
Notification. The Researchers have taken a straight forwards approach. This research paper
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.
With the advent of the Companies Act of 1985 and subsequently, the act of 2006, this doctrine
is all but eradicated from the English corporate law. Thus, all discussions on this topic in this
research paper except for the parts that deal with the current legal position are all for mere
academic discussion. However, in India the rule was never too strictly applied but continues to
persist and the Indian jurisprudence, for this reason has been discussed separately in this paper.
This research paper also analyses the doctrine of indoor management that is often called an
exception to the ruel of constructive notice but the researchers have critically evaluated the true
nature of this doctrine and its expansive ambit. The researcher has then gone ahead with
connecting this doctrine with the general principles of agency in order to restrict its ambit, lest it
become a monster like its parent, the doctrine of Constructive Notice. Here, the researchers have
started with a detailed analysis of the law of agency as applicable to the Company law. At the
same time, the researchers have taken care to maintain a coherent flow of arguments: the
doctrine of constrctive notice is restricted by the doctrine of indoor management which, in turn,
is restricted by the application of the rule of Ostensible authority.
However, this research paper has also restricted its own scope by not accounting for the liability
of the agent in cases of fraud or misrepresentation of self-authority. It also steers itself clear of
the doctrine of Ultra Vires, making only necessary and incidental references to it for the
purposes of clarifying the nature of the Doctrines of Constructive Notice and Indoor
Management.
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.
3
J.L. Montrose, the Apparent Authority on an Agent of a Company, Vol. 50, L. Q. Rev., 224, 226 (1934).
4
Boyle and Birds Company Law, 118 (1st Indian Reprint, 1997)
5
Id.
6
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.
his/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.13
13
Ashbury Railway Carriage and iron Co. Limited v. Riche, (1875) LR 7 HL 653;
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
L.S. Sealy, CASE AND MATERIALS IN COMPANY LAW, 216 (7th 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.
14
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.
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.
20
21
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
documents as has been made clear in the Ruben case27 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 would apply.28 Even in the Kreditbank case29 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
25
See Helly-Hutchinson, [1968] 1 QB 549; Howard v. Patent Ivory Manufacturing Co., [1888] 38 ChD
156.
26
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
32
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.
53
66
Id. At 173.
67
Charnock Collieries Co. Ltd. v. Bholanath Dhar, (1912) ILR 39 Cal 810
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.
68
71
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.
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
T.S. Venkatesh Aiyer, LAW OF CONTRACTS AND TENDERS, 600 (10TH 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
Palmers Company Law, 527 (21st 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.
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, almost phanatically, the third parties. 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:
1. Boyle and Birds Company Law, (1st Indian Reprint, 1997)
2. Bowstead and Renolds on Agency, (F.M.B. Reynolds ed., 16th Edn., 2001)
3. G.H.L. Fridman, THE LAW OF AGENCY (4th edn., 1976)
4. Gower and Davies Principles of Company law (8th edn., Paul L. Davies ed., 2008)
5. L.S. Sealy, CASE AND MATERIALS IN COMPANY LAW (7th edn., 2001).
6. Palmers Company Law, (21st Edn., C.M. Schmitthoff & J.H. Thomson eds., 1968)
7. Robert R. Pennington, COMPANY LAW, (8th edn., 2001)
8. T.S. Venkatesh Aiyer, LAW OF CONTRACTS AND TENDERS, 600 (10TH Edn., 2010)
9. Vincent Powell-Smith, THE LAW AND PRACTICE
RELATING TO
COMPANY DIRECTORS,
(1969).
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 LAW CASES, 732 (2003).
3. 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).
Annotated
Bibliography
Books:
1. Gower and Davies Principles of Company law (8th edn., Paul L. Davies ed., 2008)
Gower in the relevant part of his book has explained the current legal position on the issue
of the legal validity of the rule of indoor management and the doctrine of constructive
notice. He has not only comprehensively explained the ambit of Section 40 of the english
Companies Act 2006, that deals with the doctrines of ultra vires and constructive notice.
Most importantly, he has highlighted the limitations and internal contradictions in the
drafting of this section. He also highlights the assistive and complementary role of the
Turquand rule with respect to section 40.
Gower also highlights the exceptions from the ambit of Section 40, such as charitable
companies and special provisions for the employees.
2. Palmers Company Law, (21st Edn., C.M. Schmitthoff & J.H. Thomson eds., 1968)
Palmer, in the twenty first edition of his book, has brought out a clear and comprehensive
discussion on the true nature of the power with a director. He has well highlighted the
directors' position as being neither entirely that of an agent, nor completely that of a trustee.
However, he does hold them to be fiduciaries.
He also highlights the restrictions placed on the directors with respect to their dealings with
the company.
3. Bowstead and Renolds on Agency, (F.M.B. Reynolds ed., 16th Edn., 2001)
Bowstead and Reynolds are one of the most celebrated authors on the law of agency. They
have explained the fundamental rules of agency comprehensively. While explaining the
rule of agency, they have well elaborated doctrine of apparent authority as well as the limits
of the doctrine. He also explains the concept of agency with respect to companies. He goes
on to discuss the doctrines of constructive notice and indoor management breifly, yet
effectively.
He then goes on to explain the current position of law under english kaw. However, owing
to the publishing of this book before the 2006 act was passed, the book only deals with the
changes made through the companies act 1989.
Nonetheless, it deals well with the issue of estoppel as a basis for ostensible authority in an
elucid manner.
4. Boyle and Birds Company Law, (1st Indian Reprint, 1997)
Pranjal Singh, Id. No. 1829