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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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Table of Contents
Serial

Topic

Page No.

1.

List of Cases

2.

Introduction

3.

Constructive notice

4.

Statutory Reform and Constructive Notice

Effects

Ultra Vires Acts

ii

Acts beyond the authority of directores

iii

Inconsistent Agreements

6.

Doctrine of Indoor Management

10

7.

Exceptions to doctrine of indoor management

14

8.

Conclusion

21

9.

Bibliography

22

No.

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List of Cases

Mahony v. East Holyford Mining Co. (1875) L.R. 6 FT.L. 869.


Kotla Venkata Swami V. Ram Murthi, A.I.R. 1934 Mad. 579.
TCB Ltd. Gray, 1985 1986 JBL 10
Dehradun Mussouri Electric Tramway Co. v. Jagrnandardas, A.I.R. 1932

All. 141
Royal British Bank v. Turquand(1856) 6 E.P. & B. 327.
Hampshire Land Co. (1896) 2 Ch. 743.
British Thomson Houstom Company Ltd. v. Federal European Bank Ltd

(1932) 2 K.B.77
Howard v. Patent Ivory Manufacturing Co (1888) 38 Ch. P. 156
Hely-Hutclunson V. Brayhead Ltd (1966) 1 Q.B. 549
Re, Hampshire Land Co (1896) 2 Ch. 743
A.L. Underwood Ltd. v. Bank of Liverpool(1924) 1 KB. 775.
Kredit Bank Cassel v. Schenkers Ltd., (1927) KB. 826
Anand Bihari Lal v. Dinshaw & Co A.I.R. 1942 Oudh. 417
Roben v. Great Fingall Consolidated (1906) A.C. 439.

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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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Constructive Notice
After being registered with the Registrar of Companies, the memoranda and
articles become public documents and may be inspected by any on payment of the
prescribed fee. On account of it, every person dealing with the company is
expected to have read and understood the Contents of the documents before
making any contract with the company and if he does not he will have to bear its
consequences. Thus, a person dealing with a registered company is presumed not
only to have read the public document like memorandum, articles and other
regulations which form the constitution of the company but also to have
understood them according to their proper meaning.1 Whether he has read these
documents or not, he is presumed to have notice of their contents.2
In the case of Mahony v. East Holyford Mining Co.3 Lord Hatherby said Every
joint stock company has its memorandum and articles association open to all who
are minded to have any dealings whatsoever with the company, and those who so
deal with them must be effected with notice of all that is contained in those two
documents.
It is to be noted that a person dealing with a registered company is presumed not
only to have the notice of the companys powers but also the Powers of its
officers.4
It is also notable that such presumption cannot be inferred in respect of all kinds
of documents, registered with the company; for the purpose such documents may
be divided into two groups:
(a) the documents affecting the powers of the company and its agents, and
(b) other documents, i.e., the documents not affecting the powers to the
company and its agents.
A person dealing with a registered company is presumed to have read and
understood the public documents affecting the powers of the company and its
1Griffith v. Paget, 6 Ch. D. 517 Oakbank Oil Co. v. Crum, 8 App. Cas. 65; G.I. & C. Company,
L.R. 7 Eq. 29; Country Gloucester Bank v. Rudry, etc. Co., (1895) 1 Ch. 629; Owen and
Ashworths Claim, (1901) Ch. 115

2 Kredjt Bank Cassed v. henkers, (1927) 1 K.B. 826.


3 (1875) L.R. 6 FT.L. 869.
4 Baron Parke in Ridely v. Portsmouth Grinding Ch., (1848) 2 Ex. Ch. 711.
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officers, e.g. memorandum, articles and special resolution, etc,5 but cannot be
presumed to have read and understood the documents not affecting the powers of
the company and its officers, e.g., balance sheet, accounts and return etc.6
An application of the doctrine of constructive notice is found in the case of Kotla
Venkata Swami V. Ram Murthi,7 also. In this case, the articles required all the
deeds to be signed by the managing director, the secretary and a working director
on behalf of the company but a deed of mortgage was singed only by the secretary
and a working director and the deed was accepted by the plaintiff. The plaintiff
was not entitled to enforce it because if she (the plaintiff) had read the articles, she
would have discovered that a deed such as she took required execution by three
specified officers of the company and would have refrained from accepting a deed
inadequately signed.

Statutory reform and Constructive notice


In the opinion of some legal experts the doctrine of constructive notice is
considered as an unreal doctrine. This doctrine is not based on realities of business
of life. A company is known to the public at large through its officers and not
through its Memorandum and Articles of Association. The doctrine of constructive
notice has been abolished by Section 9 of the European Communities Act, 1972.
However, Section 9 of the said Act is now incorporated in Section 35 of the
(English) Companies Act, 1985. The effect of new Provision has been shown in
TCB Ltd. Gray.8Where a debenture issued by a company was not signed by the
director personally as required by the terms of Articles, in fact it was signed by a
solicitor as attorney of a director. The Articles of company contains the provision
that every instrument to which the seal shall be affixed shall be signed by a
director. It was held that even so the company was held liable. The Court while
considering the effect of new provision said that before this enactment was
5 After being registered with the Registrar, a special resolution becomes a public
document affecting the powers of the company and its officers
6 They are filed with the Registrar only for record and their purpose is merely to
provide information of the financial position of the company
7 A.I.R. 1934 Mad. 579.
8 Financial Times, Nov. 27, 1985 1986 JBL 10
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enforced a person dealing with the company was required to go through the
Memorandum and Articles of the company to satisfy himself that the transaction
was within the corporate capacity, but the scenario has been changed by virtue of
Section 9(1). This Section 9(1) states that good faith is to be presumed and that the
person dealing with the company is not bound to enquire.
The doctrine of constructive notice has not been taken so seriously by the
courts in India. For illustration, in Dehradun Mussouri Electric Tramway Co. v.
Jagrnandardas,9 as per articles, the directors could delegate all their powers
except the power to borrow. Even so an overdraft taken by the managing agents
without approval of the board was herd to be binding. The Allahabad High Court
said that such temporary loans must be kept beyond the scope of relevant
provision.

Effects.-The effect of the doctrine of constructive notice may be summed up as


follows:
1. Ultra Vires Acts :According to the doctrine of constructive notice, every person dealing with the
company is presumed to have the knowledge of the contents of memorandum and
therefore if an act is ultra vires the company, he cannot claim relief on the ground
that he was unaware of the fact that the act is beyond the memorandum (i.e., ultra
vires the company). In England, S. 9(1) of the European Communities Act, 1972,
has changed the position with effect from 1-1-1973 to the effect that a transaction
which is ultra vires the company will be binding on the company and the
company cannot plead that it has acted ultra vires or the transaction is ultra vires
provided the outsider dealing with the company has acted in good faith and the
transaction has been decided upon by the companys board of directors. However,
there is no such legislation in India and consequently in India, the outsider dealing
with the company is presumed to have the knowledge of the contents of the
memorandum and therefore if an act is found to be ultra vires, he cannot claim
relief on the ground that he had no knowledge that the act was beyond the
memorandum and, therefore, ultra vires.
9 A.I.R. 1932 All. 141; See also Charnock Collieries Ltd. v. Bholanath, I.L.R.
(1912) 39 Cal. 810 arid Probodh Chandra v. Road Oils (India) Ltd., I.L.R,. (1929)
57 Cal. 1110
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2. Acts beyond the authority of directors.


If this lack of authority of the directors or other agents of the company is evident
from the public documents like articles and other regulations, the person dealing
with the company will be presumed to have the notice of the lack of authority and
therefore he cannot hold the company bound by the act of the directors (or other
agents). For example, if the articles require a bill to be signed by two directors, a
person dealing with the company is under duty to see that it has been signed by
the two directors, otherwise he cannot enforce the bill against the company. But if
the lack of authority of the directors or agents is not evident from the public
documents, he cannot be presumed to have the notice of the lack of authority and
therefore he can hold the company bound by the act of the directors or other
agents if he honestly thinks that the director or agent with whom he is negotiating
is authorized to act on behalf of the company. For example, where the articles
require the directors to take the consent of the shareholders by ordinary resolution
for exercising thereof borrowing powers but they borrow money without taking
such consent the borrowing will be binding on the company if the creditor has no
notice of the fact the directors negotiating with him have not taken such consent.
3.Inconsistent agreements Person dealing with the company is presumed to have the notice of the contents of
articles and consequently he cannot make a contract with the company which
purports to override any rights created by the articles.
The doctrine of constructive notice protects the company but not the outsiders
dealing with the company. Sometimes the doctrine creates much hardships for the
outsiders. They are presumed to have the knowledge of the public documents like
the memorandum of the company but in practice it is very difficult and time
consuming to have the complete knowledge of them before making any contract
with the company. Thus, the doctrine is inconvenient and unreal. It has failed to
take note of the realities of business life. On account of its evils the doctrine has

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not been taken seriously both in U.K. and India 10. In England the doctrine has
been abrogated by the European Communities Act. 1997. 11
The doctrine of constructive notice is subject to the following doctrines :
I.

Doctrine of Indoor Management

II.

Doctrine of Holding out

I. Doctrine of Indoor Management12


The doctrine of constructive notice is subject to the doctrine of indoor
management. According to the doctrine of indoor management, an outsider
dealing with the company is required to see that the authority of dealing had been
given by the articles to the person with whom the outsider is dealing but he cannot
be assumed to do anymore; he is not expected to enquire whether the proper
procedure has been followed for the delegation of the authority to the person with
whom the outsider is dealing;13 he may be presumed to have the knowledge of the
constitution of the company but not what may or may not have taken place within
indoors which are closed to him.14 The doctrine entitles the outsider dealing with
the company to assume that the things have been done in accordance with the
provisions and proceedings stated in the articles. Thus, every outsider is entitled to
assume the regularity of internal proceedings unless he has the knowledge of the
irregularity. The doctrine implies responsibility on the person in charge on the
management of the company to see that all the rules of internal management of a
company are complied with and the company will he liable to the outsider for the
ac of his directors or agents even if the internal formalities or internal procedures
have not been complied with. An example will make the point more clear. If the
10 Dehra Dun Mussoorie Electric Tramway Co. V. Jagrnundards, A.1.R. 1932 All
141; Charnoek Collieries Ltd. v. Bliolanath, (1912) 39 LLR. Cal. 810; Probodh
Chandra V
11 S. 99 of the European Communities Act, 1972
12 For detailed study, see, V. Rameshari, Protection of Contractors with
Companies, (i964) 2 Comp. L.J. 210; P.S. Sangal, Royal British Bunk v. Thrquaiul
and Indian Indian Cases, (1964) 2 Corn p. U. 113.
13 Bigger Staff V. Rowatts Wharf,(1896) 2 Ch. 93.
14 Pacific Coast Coal Mines v. Arbuthnot, (1917) A.C. 607.

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articles give power to the managing agent of the company to borrow money with
the approval of directors but the managing agent borrows without such approval,
the lender will not be affected by such irregularity, he may presume that before
borrowing, the managing agent has taken the approval of the directors and
consequently the company will be bound by the loan. However, if the lender has
the knowledge of the irregularity, the position would be quite different. The lender
will not be protected the position would be quite different. The lender will not be
protected and consequently the loan will not be binding on the company.15
The object of this doctrine is to protect the outsider with a company. The
doctrine is based on business convenience for business could not be carried on if
everybody dealing with the apparent agents of a Company was compelled to call
for evidence that all internal regulations had been duly observed. 16Since
memorandum and articles are public documents open to public inspection, an
outsider is presumed to have the knowledge of their contents, but the details of
internal procedure are not open to public inspection and therefore it would be
unfair if an outsider dealing with the Company is presumed to have the knowledge
of the details of internal procedure (i.e. the rules of internal management).
The doctrine was first developed in the case of Royal British Bank v.
Turquand.17The doctrine of indoor management is also known as rule in
Turquands case. In this case, the directors were empowered by its registered deed
of settlement18 to borrow on bond such sums as should be authorized by a general
resolution passed at general meeting of the company. The company borrowed
money and issued a bond signed by two directors under the seal of the company.
When the lender sued on the bond, the company contended that there had been no
resolution authorizing the loan and therefore the bond was given without authority
(i.e., the borrowing was unauthorized) and consequently it was not binding on the
company. The Court rejected the contention of the company and held the company
bound by the loan (or bond). Having ascertained that borrowing might be
15 Balasara Wathi Ltd. V. A. Parmeshwar, A.LR. 1957 Mad. 122.
16 Palmers Company Law, P. 36.
17 (1856) 6 E.P. & B. 327.
18 Until 1862 memorandum and articles were found in one document called the
deed of confinement
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authorized by a resolution of the company, the plaintiff (the lender) had right to
assume that the necessary resolution had been passed. The doctrine of indoor
management developed in the case of Royal Bank v. Turquand is based on reason
and justice. It has been applied by the courts in a number cases to secure justice.

The cases in which the doctrine has been applied may discussed under the
following heads.19
(a)Cases where directors title to office is defective
Any transaction entered into or act done on behalf of company be de facto
directors will be binding on the company even though appointment of such
directors is found defective provided the outsider dealing with the company has no
knowledge of it because the outsider is entitled to presume that the directors
dealing with him have been properly appointed.20 Even if de facto directors have
never been appointed21 their act done on behalf of the company will be binding on
the company if they are in control of business of the company and the outsider is
unaware of the fact that the director have been appointed.22
(b)Failure to hold properly convened meetings
Directors are required to exercise their power collectively by resolving at properly
convened meetings of the board of directors that acts shall be done in the name of
19 Penningtons Company Law (Third Ed.) P. 114
20 Sec Pudurnjec & Co. v, Moos, A.I.R. 1926 Bom. 28; P.C. Mitra v. Road Oil
(India) Ltd., (1929) I.I..R. 57 Cal. 1101
21

Muhnizz v. Iast J1oluftrd Mininq Co., (1875) L.R. 7 H.L. 869; Duck v. Tower
Galvunizinqco.,(1901) 2 K.B. 314; Re, Country Lift Assurance Co., (1870) . S Ch. App.
288; Imperial Oil and

General Mills v. Wazin Singh, A.I.R. 19l5 Lah. 478; Sree Minakshi Mills v. Callianjee, A.I.R.
1935 Mad,. 799.

22 Sec Mahony v. East Holyford Mining Co., (1875) L.R. 7 H.L. 869. For critical
study of Indian cases, see P.S.. Sangal Royal British flunk V. Turquand and Indian
Law (1964) 1 Comp. L.R. 117.
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the company. But sometimes it is found that a transaction entered into by one or
some of the directors in the name of the company has not been approved by a
resolution passed at a regularly convened board meeting. We will consider here
the fate of such transaction.
In short the position of law appears to be that the act done on behalf of company
by the directors will be binding on the company even if the meeting of the Board
was irregular as no present or proper notice of the meeting of the board was given
in advance to each director,23 provided the outsider dealing with the company is
still protected because he is presumed to have the knowledge of the number of
directors who from quorum, but he is not required to see that the number of
directors in fact attended the board meeting24 and this is logical because even
though the outsider knows what number of directors should attend he had so
means of ensuring that number actually did attend.25
Similarly an act done by the directors in the name of the company will be binding
on the company even if the act has been done without a board meeting being held
at all, provided the outsider dealing with the company has no knowledge of it. 26 Its
reason is that the outsider has no means to discover whether a board meeting has
been properly held. Thus a debenture, which was issued under the seal of the
company, was held binding on the company, even though no board meeting to
sanction its issue was held at all.
(c) Disregard of limitations on the directors authority 27
The doctrine of indoor management also protects an outsider dealing with the
company in a condition where the directors have authority under the
memorandum and articles of the company with the limitation that they should
23 Brotone v. La Trinidad, (1887) 37 Ch. D. 1
24 Prince of Wales Assurance Society V. Athenaeum Assurance Society, (1858) 3
C.B.N.S. 756, Davis v. R. Boltom & Co., (1894) 3 Ch. 678.
25 Pennington, Company Law, (Third edn.) p. 118
26 Davis v. Boltom & Co. (1894), 3 Ch. 678: Duck V. Towering Galvanizing Co.
(1901) 2 KB. 314.
27 For detailed study, see P.S. Sangal, Royal British Bank v, Thrquand & Indian
Law, (1964) 2 Comp. L.J. 173. The author has critically examined the Indian cases
on the subject.
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exercise their authority if certain conditions are fulfilled or a special procedure is


followed but they exercise their authority without fulfilling the conditions or
following the specific procedure. In other words, the act done by the directors who
have authority to do the act after fulfilling certain conditions or following a
specific: procedure will be binding on the company even if the conditions have
not fulfilled or the procedure has not been followed, provided the outsider has o
knowledge of the fact that the conditions have not been fulfilled or the procedure
has not been followed. Its reason is that the outsider may be presumed to have
knowledge of the conditions required to be fulfilled or procedure required to be
followed before the exercise of the power but he cannot be presumed to have
0wlcdge of the fact that the conditions have not been fulfilled or the procedure has
not been followed. He has no means of knowing that the conditions or procedure
prescribed by the memorandum or articles have actually been adhered or not. The
best illustration is found in Turquands case which facts have been stated above.
In Hampshire Land Co.28, it has been held that if the directors have authority to
borrow money on behalf of the company up to a certain limit specified in the
articles and also in excess of the limit if a general meeting of the company
consents, the borrowing in excess of the specified limit will be on the company
even if the necessary consent has not been taken provided the lender is unaware of
the fact that the necessary consent has not been taken. Its reason is that the lender
is entitled to assume that the necessary consent has been taken before the
borrowing in excess of the limit.
In British Thomson Houstom Company Ltd. v. Federal European Bank Ltd.29, by
articles, the directors were empowered to delegate one or more or their own body
such of the powers conferred on the directors as they consider requisite for
carrying on business of the company and to determine who should be entitled to
sign on the companys behalf bills, receipts, acceptances, contracts and
documents. N. Pal, one of the directors, executed a guarantee. The company
contended that the director had no authority to execute the guarantee and therefore
28 (1896) 2 Ch. 743.
29 (1932) 2 K.B.77; See also Dey v. pullinger Engineering Co., (1920) 1 K.B. 77,
Bigger Staff v. Rowatts War! Ltd., (1896) 2 Ch. 93; Mercanfile Bank of India v.
Chartered Bank of India, Australia and China and Strauss & Co., (1973) 1 All E.
231.
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it was not bound by it. The Court held that the company was liable on the
guarantee because the plaintiff was entitled to assume that N. Pal had been
authorized by the directors to sign a contract on behalf of the company.

Exceptions to the doctrine of indoor management


The doctrine of indoor management or rule in Turquaflds case does not apply in
the conditions mentioned below:
1. Notice of irregularity:
The doctrine of indoor management or the rule of Turquands case does not apply
if the party affected by an irregularity may be taken to have ow1edge of such
irregularity if he was himself a party to the internal management.
In Howard v. Patent Ivory Manufacturing Co30. the articles empowered the
directors to hot-row up to pounds 1000 and such further sums as the general
meeting might authorize. The company borrowed pounds 3,500 from the directors
without the authority of the general meeting and issued debentures to them. The
Court held that the debentures were valid to the extent of pounds 1000 only. Since
the directors were themselves party to the internal proceedings they were taken to
have the notice of the fact that the necessary resolution had not been passed and
therefore they could not be protected by the rule in Turquand's case (or the
doctrine of indoor management).
However, in Hely-Hutclunson V. Brayhead Ltd.31 the above men principle, that a
person who is a party to the internal management will be deemed to have the
knowledge of the irregularity of internal proceedings (if any), has not been strictly
followed. The Court held that a person cannot be deemed to have the knowledge
of the irregularities of internal management merely because he is a director and
consequently a part of the internal machinery.
However, the view that a person who is himself a part of internal,
machinery should be deemed to have knowledge of the irregularity of internal
management appears to be more correct and practical.
30 (1888) 38 Ch. P. 156; See also Tyne Mutual Steamship Insurance Association
v. Brown, (1896) 74 L.T. 283; Morris v. Kansen, (1946) A.C. 459.
31 (1966) 1 Q.B. 549.
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The principle that a person dealing with the company will not be protej1
he has knowledge of the irregularity, is not confined only to persons dealing with
the company but extend to the cases where one company has dealing with another
company. Thus, where a company dealing with another company affected by the
irregularity in the internal management of the other company, it cannot be
protected under the rule in Turqitands case if it had notice of the
irregularity.32Ordinarily, a company is not automatically deemed to have the
knowledge of the irregularity in the internal management of the company with
which it is dealing merely because it has a common officer (as director or
secretary) with that other company, but the company may be presumed to have the
knowledge of the irregularity if the common officer had some duty imposed upon
him to communicate the knowledge to the other company, and had some duty
imposed upon him by the company which is alleged to be affected by the notice to
receive the notice.33
In Re, Hampshire Land Co34., the directors of a company were empowered
to borrow money on behalf of the company but not beyond a certain limit without
the consent of a general meeting. The directors borrowed beyond this limit and a
general meeting gave the required consent, but the notice summoning the meeting
did not state that the borrowing to be authorized was beyond the limit. The
secretary of the company borrowing the loan was also the secretary of the society
lending the company and he knew of the irregularity. The Court held that the
knowledge acquired by the secretary as officer of the company could not be
imputed to the Society because he was under no duty to communicate it to the
society and no duty was imposed on him by that society to receive it. Thus, the
borrowing was binding on the recover it company and society (lender) was
entitled to recover it.
32 T.R. Pratt Ltd. v. Sasson & Co. Ltd., 37 Born. L.R. 978.
33

Re, Marseilles Extension Rly., (1971) L.R. 7 Ch. i6i; Gale v. Lewis, 9 Q.B. 730 Re,
HampshireLand Co., (1896) 2 Ch. 743; Young v. David Payne & Co., (1804) 2 CK 608;
Re, Fenwick Stobart

& Co., (1909) 1 Ch. 506.

34 (1896) 2 Ch. 743; See also Fenwick, Stobart & Co. Ltd., (1902) 1 Ch. 506
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2. Suspicious circumstances inviting inquiry:


The doctrine of indoor management does not apply where the person
seeking to rely on it is put on inquiry in circumstances under which he would have
discovered the irregularity if he had made inquiries.
In A.L. Underwood Ltd. v. Bank of Liverpool,35 a sole director of a
company paid into his own account cheques drawn in favour of the company; the
bank collected the cheques and credited him with the proceeds. The bank was
sued by the company on behalf of a debenture-holder claiming damages for
conversion. The bank was held liable and it was not protected under the rule in
TurquafldS case because the fact that the director had paid the cheques drawn in
favour of the company into his private account was so unusual to put the bank on
inquiry and the bank was negligent in failing to make proper inquiries.
It is notable that if the act of an officer of a company is such as would
ordinarily be beyond the powers of such officers, the act will not be binding on the
company merely because under the articles of the company, power to do the act
could have been delegated to him. The fact that the act is beyond the apparent
authority of such officers is sufficient to put the plaintiff on inquiry to ascertain
whether the officer has in fact been given the authority to do the act. in such a
case, the act will be binding on the company only if the power to do the act has
actually been delegated to the officer, i.e., if the officer has actual authority to do
the act on behalf of the company.
In Kredit Bank Cassel v. Schenkers Ltd.,36 certain bills of exchange were
drawn in the name of the defendant company (who were forwarding agents) by its
branch manager who had the authority to draw bills on behalf of the company. The
bills so drawn were not binding on the defendant company because the drawing of
bills was not within the apparent or ostensible authority of the branch manager
and consequently the plaintiff was under duty to inquire as to the authority of the
branch manager to draw the bills on behalf of the defendant company. The
defendant company would have been bound if it bad given him actual authority to

35 (1924) 1 KB. 775.


36 (1927) KB. 826.
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draw bills on its behalf but in this case, no such authority was given to the branch
manager and consequently the defendant company was not liable on the bills.
Similarly, in Anand Bihari Lal v. Dinshaw & Co.37 an accountant of the
company without authority transferred the property of the company to the
plaintiff. The transfer was held to be void for it is not within the apparent authority
of the accountant to transfer the property of the company. The transfer would have
been the defendant company f it had given the accountant actual authority to
transfer its property but since no such authority was given to the accountant the
transfer was not binding on the company.
3. Forgery:
The doctrine of indoor management does not apply where the act, done in
the name of the company are void ab initio. Thus, if the document on which the
person seeks to rely is a forgery the doctrine of indoor management will not be
app1icable.
In Roben v. Great Fingall Consolidated38, the question arose whether the company
was bound by a short certificate to which the companys seal had been affixed by
the company's secretary without authority and the forged signatures of two
directors were added. In this case, the share certificate was issued by companys
secretary who had forged the signatures of two directors and affixed the seal of the
company without any authority, It was held that the company was not bound by
the share certificate because it was forged and, therefore, a Lord Lore burn has
observed that the doctrine of indoor management applies only to irregularities that
otherwise might affect a genuine transaction, but it cannot apply to a forgery.
However, a company may be bound even by a forged document on the
ground of holding out or estoppel. A company may be estopped from relying on
the fact of forgery if the forged document has been represented as genuine by
officer or agent of the company having actual or ostensible authority to do so. 39
Thus as Thompson has observed, the company will be bound even by a forged
document if the company represents that the forged instrument is genuine because
37 A.I.R. 1942 Oudh. 417.
38 (1906) A.C. 439.
39 Sealy, L.S. Cases and Materials on Company Law, p. 207.
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in such a case it will be estopped from denying that forged instrument is genuine
as against an outsider who has relied to his detriment upon the representation. 40
Besides, a company will also be bound by a forged document provided the
outsider pleading estoppel against the company has relied on the forgers apparent
authority to execute the instruments. Thus, where a director who has ostensible
authority to borrow money under its memorandum and articles commits fraud of
the company by not placing the money borrowed by him on behalf of the
company, the borrowing will be binding on the company provided the lender is
bona fide and thus the company cannot be allowed to refuse the payment of the
loan on the ground of the fraud of its own officer.41
4. No knowledge of the contents of articles :
Sometimes articles contain a delegation clause providing that the board of
directors can delegate its authority to an individual director. If an outsider dealing
with the company has the knowledge of delegation clause, he may assume that the
power of delegation has been exercised and the director entering into contract with
him on behalf of the company has been delegated authority to make such contract.
The actual delegation being a matter of internal management1 he is Not bound to
enquiry as to whether the authority has actually been delegated to the director or
not.42
However, the most controversial issue is whether an outsider entering into
a contract with an individual director purporting to act on behalf of his company
without having the knowledge of such delegation clause at the time of making
such contract can also assume that the power of delegation has been exercised and
the director has been delegated the authority to make such contract on behalf of
the company.
According to one view43 he is not entitled to assume so. For example, in the case
of Rama corporation v. Proved Tin and General Investment Co 44., the of the
defendant company contained a delegation clause providing that the directors
40 Andrews R. Thompson, Company Law Doctrine and the Authority to Contract,
(1955-56) 11 Toronto Law ,Journal, 238, 275.
41 Sri Krishan v. Mondal Bros. & Co., (1967) 1 Comp. L.J. 10.
42 Lakshmi Rattan La! Cotton Mills v. J.K. 1Jute Mills, A.I.R. 1957 All. 311.
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may delegate any of their powers, other than the power to borrow and make calls,
to committees consisting of such members of their body as they think fit. But in
fact the Board of Directors had not delegated any of their powers. A director of the
defendant Company entered into a contract with the plaintiff company to
participate in a joint venture concerning the sale of a telephone directory but he
did not disclose to the Board anything about the contract. The plaintiff company
had no knowledge of the delegation clause at the time when the 0ntract was
entered into. The defendant company repudiated the contract. The plaintiff
company tried to enforce the contract on the strength of delegation clause in the
articles of the defendant company. The Court held the plaintiff company was not
bound by the agreement. Since the plaintiff company had no knowledge of the
delegation clause when the contract was entered into, it was not entitled to
assume that the power of delegation had been exercised and the director entering
into the contract had been delegated an authority to do so. Its reason is that rule in
Turquarids case or the doctrine of indoor management is based on the principle of
estoppel and, therefore, where a person has knowledge of articles, he can assume
that the officer openly exercising the authority has been delegated such authority
and the company can be estoppel from alleging that the officer was not in fact so
authorised.45 The view does not appear to be more correct because an outsider
dealing with the company is deemed to have constructive notice of the articles and
also because even if he had consulted the articles, he would not be able to know
whether the director had actually been delegated the authority.
The better view is that if an outsider dealing with the company entered into
a contract with an individual director of the company purporting to act on its
behalf and the contract is within the apparent or ostensible authority of the
director, the contract will be binding on the company even if the outsider had no
43

Houghtion & Co. v. Norhard, Lowe and Wills Ltd., (1927) 1KB. 246; Rama
Corporationv.Proved Tin and General Investment Co., (1962) 2 Q.B. 47, The view of
Mukerji, J., in

Sri Kishan v. Mondal Bros. & Co.

44 Ibid
45 ibid
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knowledge of the articles of the company when he contracted with the director,
unless it is proved that the company under its memorandum or articles, had no
capacity either to make such contract or to delegate the authority to make such
contract to the director.46

46

British Thompson Houston Co. v. Federated European Bank Ltd., (1932) 2 KJ. 176;
KreditBank Cassel v. Schenkes Ltd., (1927) 1 K.B. 826 MahOllICd v. Ravcit Bombay
House, (1958)

S.A 704; Lakshmi Rattan Lal Cotton Mills V. J.K. Jute Mills, A.LR. 1975 All. 311; Freedom
Lockyer v. BucklZttrSt Park Properties (Maitgai) Ltd., (i964) 2 Q.B. 480.

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Conclusion
The rule of constructive liability is a unrealistic doctrine. It is an imaginary
doctrine and is a fiction created by the judicial pronouncement of the Courts.
Innumerable parties enter into a number of contracts in everyday business of the
company. This doctrine expects each and every outsider not only to know the
documents of the company but also presume to understand the exact nature of
documents, which is practically not possible. In reality, the company is not known
by the documents but by the people who represent it and deal with an outsider.
The outsiders do the business and enter into contracts not always on the basis of
documents of the company but the goodwill and the reputation of the directors or
officers who are representing the company.
This is the reason why the British Courts and Indian Courts have shifted its
approach in dealing with the cases relating to the outsider of the company. The
Indian Courts have not given much importance to this doctrine. The European
Communities Act has also abrogated the concept of constructive notice by
bringing Section 9 of the Act which recognizes the concept of good faith in
business transaction. This provision is in the tune of the reality of the business
transaction, where the outsiders of the company enter into the various contracts
not on the basis of the documents of the company but on the good faith of the
company.
This is the reason why the courts have evolved the doctrine of indoor
management as an opposite to the doctrine of constructive notice in order to
protect the interests of the outsiders.
The researcher on the basis of the various commentaries on the subject and the
cases decided by the British Courts and Indian Courts is of view that merely
registration of a company should not constitute the notice of the documents
submitted to the registrar. Also, an outsider should always have the freedom to
make some assumption which a reasonable person may infer into the particular
circumstances.

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


2. Dr.S.C Tripathi, Modern Company law,(1st edition)
th

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ed., 2008)
4.

st

Palmers Company Law, (21 Edn., C.M. Schmitthoff & J.H. Thomson

eds., 1968)
5. Robert R. Pennington, COMPANY

LAW,

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(8 edition, 2001)

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