Doctrine of Constructive Notice and Indoor

Management
Azeem Rasic Nabi
B.A.L., LL.B.
Bangalore University

Doctrine of Constructive Notice

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. In other words knowledge which according to law a
person is presumed to acquire by making normal and reasonable enquiries.
In companies law the doctrine of constructive notice is a doctrine where all
persons dealing with a company are deemed or construed to have knowledge of
the companys articles of association and memorandum of association.
Section 399 of the Companies Act, 2013 contemplates that the memorandum
and articles when registered with the Registrar of Companies become public
documents and then they can be inspected by anyone on payment of nominal
fee. Therefore, any person who contemplates entering into a contract with the
company has the means of ascertaining and is thus presumed to know the
powers of the company and the extent to which they have been delegated to the
directors. In other words, every person dealing with the company is presumed to
have read these documents and understood them in their true perspective. The
rule of doctrine of constructive notice not merely extends to the memorandum
and articles but also to such documents as are required to be registered with the
Registrar Companies. There is however no constructive notice of documents
which are filed with the Registrar of Companies for the sake of record only.
The memorandum of association and articles of association are two most
important documents needed for registration and incorporation of a company.
The memorandum of association is the charter and constitution of a company.
The memorandum contains the fundamental conditions upon which alone the
company has been incorporated. According to Section 2(56) of the Companies
Act, 2013 memorandum means the memorandum of association of a company
as originally framed or as altered from time to time in pursuance of any previous
company law or of this Act. The memorandum is a document which sets out the
constitution of a company and is therefore the foundation on which the structure
of the company is built. It defines the scope of the companys activities and its
relations with the outside world.
To enable the shareholders, creditors and those who deal with the company to
know what is the permitted range of enterprise.
-Lord Macmillan
The articles of association of a company are its bye-laws or rules and regulations
that govern the management of its internal affairs and the conduct of its

business. According to Section 2(5) of the Companies Act, 2013 articles means
the articles of association of a company as originally framed or as altered from
time to time or applied in pursuance of any previous company law or of this Act.
Both memorandum and articles are public documents as soon they get
registered and can be accessible by any members of the public under the
provisions of the Act. Therefore, notice about the contents of memorandum and
articles is said to be within the knowledge of both members and non-members of
the company. Such notice is a deemed notice in case of a members and
constructive notice in case of non-members.
The effect of the doctrine of constructive liability is harsh on the other party. It
is, therefore, the duty of every person dealing with a company to inspect its
public documents and make sure that his contract is in conformity with their
provisions. Also the rule of the doctrine is that the person dealing with the
company is considered not only to have read those documents but to have
understood them according to their proper meaning. He is presumed to have
understood not merely the companys powers but also those of its officers. The
rule looks unrealistic and imaginary and is a fiction created by the judicial
pronouncement of the Courts. The doctrine expects every outsider not only to
know the documents of the company but to understand the exact nature of the
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.
This is the reason why the Courts have evolved the doctrine of indoor
management.

Doctrine of Indoor Management

The Doctrine of Indoor Management popularly known as Turquands Rule derives
its name from the case of Royal British Bank v Turquand. This case came before
the Court of Exchequer through an appeal filed by the defendant, Turquand, who
was the official manager of Camerons Coalbrook, Steam, Coal and Swansea and
London Rail Company, registered under the Joint Stock Companies Act, 1844. The
company had given bond for 2000 pounds to the Royal British Bank, which
secured the companys drawings on its current account. The bond was under the
companys seal, signed by two directors and the secretary. When the company
was sued, it alleged that under its registered deed of settlement (articles of
association), the directors only had the power to borrow up to an amount
authorized by a company resolution. A resolution had been passed but not
specifying how much the directors could borrow. The plaintiffs i.e. the Royal
British Bank alleged that the company was bound to pay as they had
acknowledged this debt through a bond bearing the common seal of the
company and signed by two directors.
The Court of Exchequer did not accept this contention and held that the bond
was valid, so the British Bank could enforce the same. The Court held that the
evidence showed that such resolution had been passed but the amount of money
which the directors were authorized to borrow was never defined. The Court

stated that though the public should have known the contents of the documents
that are published, they were not obliged to do more and any party reading the
deed in the instant matter would find that there was no prohibition from
borrowing stated in the deed. Thus, any such party was entitled to assume that
all internal procedural conditions not mentioned in the deed had been followed.
Thus the Court ruled against the defendant directors and enunciated the rule
that is now known as the Turquand rule or the Doctrine of Indoor Management.
Principle: it lays down the person dealing with company are obliged to satisfy
that his proposed contract or transaction is in consonance with the memorandum
and articles of a company but he is not bound to see and know the internal
irregularities of the company and if there are any then the company will be liable
as the person has acted in good faith. An outsider dealing with the company is
can only find the substantive aspect by reading the memorandum, articles and
other public documents. Even though he may find the procedural aspect but he
cannot find out whether the procedure the procedure has been followed or not.
Hence an outsider is presumed to know the constitution of a company, but not
what may or may not take place within the company of which he has no
knowledge.
The rule in Turquands case was not accepted as being firmly entrenched in law
until it was endorsed by the House of Lords in Mahony v East Holyford Mining Co,
Lord Hatherly phrased the law thus:
When there are persons conducting the affairs of the company in a
manner which appears to be perfectly consonant with the articles of association,
those so dealing with them externally are to be affected by irregularities which
may take place in the internal management of the company.

Conclusion
The Doctrine of Indoor Management is conflicting to the Doctrine of Constructive
Notice. The latter seeks to protect the company against outsiders and the former
operates to protect the outsiders against the company. The Indoor Management
rule was carved out so as to prevent the harshness of principle Constructive
Notice used by the companies to their own advantage, but the Turquands rule
cannot be applied in all cases and therefore in essence a harmonious balance
has to be maintained so as to promote transparent business transactions
between the company and outsiders.