Corporate Law-I Assignment

Submitted by
Name: Tahera Zufashan
Student ID: 202104882
B.A. LL.B (6th Semester) (Self-financed)
Faculty of Law, Jamia Millia Islamia

Submitted to: Prof. Qazi Usman Sir (Faculty of Law,

Jamia Millia Islamia, New Delhi)

Assignment Topic: “DOCTRINE OF CONSTRUCTIVE

NOTICE AND IT’S LIMITATION”

1|Page
 TABLE OF CONTENTS

S.no. Content Page no.

1. Introduction 3

2. Provisions of Company Law 3

3. Statutory reform of constructive notice 5

4. Position in India 6

5. Effect of Doctrine of Constructive liablity 6

6. Criticism Of Doctrine of Constructive 7

Liability: Evolution of Doctrine of
Indoor Management

7. Common Law Cases 8

8. Doctrine of Indoor Management 11

9. Representation of articles 12

10. Conclusion 13

2|Page
 DOCTRINE OF CONSTRUCTIVE NOTICE & ITS LIMITATION

I. INTRODUCTION OF CONSTRUCTIVE NOTICE

Every person who enters into any contract with a company will be presumed to know the
contents of the memorandum of association and the articles of association. This is known as
the doctrine of constructive notice.

The memorandum and the articles of association of every company are registered with the
Registrar of Companies. The office of the Registrar is a public office. Hence, the memo and
the articles of association become public documents. It is therefore the duty of person dealing
with a company to inspect its public documents and make sure that his contract is in conformity
with their provisions.

As observed by Lord Hatherley whether a person actually reads them or not, he is to be in the
same position as if he had read them, every person will be presumed to know the contents of
the documents.

II. PROVISIONS OF COMPANY LAW

• What is constructive notice?
Sec 610 of the Companies' Act 1956 provides that the inspection, production and evidence
of the document kept by register. It provides that the memorandum and articles when
registered with register of company become public document and then they can be inspected
by anyone on payment of a 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 extent to which they have been delegated to the directors.1

• Memorandum of Association.

For the incorporation of a company, memorandum of association and articles of association are
two important terms.

The Memorandum of association of company, often simply called the memorandum, is one of
the most important documents and must be drafted with care. It has to file with the registrar
of companies during the process of incorporation of company. It contains the fundamental

1
24th Edition, Dr. G.K Kapoor & Dr. Sanjay Dhamija, Company Law and Practice, 180 (Taxmann’s , August
2019)

3|Page
 conditions upon which the company is allowed to operate. It is document that governs the
relationship between the company and outside. It is one of the documents required to
incorporate accompany is the United Kingdom, Ireland, India, Nepal and is also used in many
of the common law jurisdictions of the common wealth.2

• Articles of Association

The articles of association is a document that specifies the regulations for accompany
operations and they define the company purpose and lay out how tasks are to be accomplished
within the organization, including the process for appointing directors and how financial
records with handled. Articles of association often identify the manner in which a company
will issue stock shares, pay dividends and audit financial records and power of voting right.3

Kotla Venkataswamy v. Ramamurthy4

The articles of a company provided that its deeds, etc. should be signed by the managing
director, the secretary and a working director on behalf of the company, the plaintiff accepted
a deed of mortgage executed by the secretary and a working director only. The plaintiff could
not claim his deed. It was held that, "notwithstanding, therefore, she may have acted in good
faith and the money may have been applied for the purposes of the company, the bond is
nevertheless invalid.

Another effect of this rule is that a person dealing with the company is taken not only to have
read the documents but also to have understood them according to their proper meaning.
Further, there is a constructive notice not merely of the memorandum and article, but also of
all the documents, such as special resolutions and particulars of charges which are required by
the Act to be registered with the Registrar. But there is no notice of documents which are filed
only for the sake of record, such as returns and account.

2
Pearl Narang, Memorandum of Association : Know everything about it, Companies Act 2013, iPleaders blog
(June 2022, 06:22 P.M.) https://blog.ipleaders.in/memorandum-of-association-2/
3
Ibid
4
Air 1934 Mad 579

4|Page
 Rama Corporation v. Proved Tin and General Investment Co. (1952)5

The director of the plaintiff company formed an agreement with the director of the defendant
company which would enable them to subscribe funds which they can use to finance the sale
of goods produced by a third company. The director of the plaintiff company gave a cheque to
the defendant company. But as per the articles of association of the defendant company only a
director to whom the power of the board has been delegated, can collect a cheque on the behalf
of the company. The plaintiff hadn't read the defendant's articles and was unaware of this
clause. In the decision of the court applied the doctrine of constructive notice and the defendant
company was held not bound by the agreement.

III. STATUTORY REFORM OF CONSTRUCTIVE NOTICE

Section 9 of the European Communities Act, 1972 has abrogated the doctrine of constructive
notice. The provision of Section 9 is now incorporated in Section 35 of the Companies Act,
1985 Additionally the Companies Act 1989 introduced two further sections into the 1985 Act
to deal with the constructive notice.

Section 35B of the Companies Act stated:

A party to a transaction with the company is not bound to enquire as to whether it is permitted
by the company's memorandum or as to any limitation on the powers of the board of directors
to bind the company or authorize others to do so.6

This was supposed to be introduced by Companies Act, 1985, S.711A which was to abolish the
concept of constructive notice for corporations. However, S.711A has never been implemented
and so only section 35 B dealt with constructive notice.

An example of the impact of this provision was seen in the case of TCB Limited v. Gray, where
the debenture issued by the company was signed by solicitor but not by the director himself.
The articles of the company required the signature of the director for this purpose. Even so, the
company was held liable. Stating the effect of the new provision, the Court said that before this
enactment came into force a person dealing with the company was required to look into the
memorandum and articles of the company to satisfy himself that the transaction was within the

5
[1952] 2 QB 147
6
The Companies Act, 1985

5|Page
 corporate capacity but that section 9(1) had changed this. The sub-section says that good faith
is to be presumed and that the person dealing with the company is not bound to inquire.

IV. POSITION IN INDIA

The courts in India do not seem to have taken the doctrine seriously. For example, the Calcutta
High Court in Charlock Collieries Co Ltd. v. Bholanath, enforced a security which was not
signed in accordance with the company's articles.

Also, in Dehra Dun Mussorie Electric Tramway Co. v. Jagmandardas, the Allahabad High
Court allowed an overdraft incurred by the managing agent of a company when under the
articles the directors had no power to delegate their borrowing power

• As criticisms of the doctrine of Constructive Notice

The new theory called the doctrine of indoor management has been evolved by the courts.
The doctrine of constructive notice seeks to protect the company against the outsider, the other
doctrine operates to protect outsiders against the company. The rule of indoor management is
based upon obvious reasons of convenience in business relations. Firstly, the memorandum and
articles of association are public documents, open to public documents. But, the details of
internal procedures are not thus open to public inspection. Hence, 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.

V. EFFECT OF THE DOCTRINE OF CONSTRUCTIVE LIABILITY

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. The Madras High Court discussed the scope
of the rule of constructive liability in Kotla Venkataswamy v. Ramamurthy. The dispute in this
case was whether the mortgage bond was validly executed as per the company's articles of
association so as to make the company liable. Article 15, of the Company's Articles of
Association provides that all deeds, hundis, cheque, certificates and other instruments hall be
signed by the Managing director, the Secretary and the working Director on behalf of the
Company, and shall be considered valid. In the instant case, the plaintiff accepted a deed of

6|Page
 mortgage executed by the secretary and a working director only. The court held that the plaintiff
could not claim under this deed. The Court further observed that if the plaintiff had consulted
the articles she would have discovered that a deed such as she took required execution by three
specified officers of the company and she would have refrained from accepting a deed
inadequately signed. Notwithstanding, therefore, she may have acted in good faith and her
money may have been applied to the purposes of the company, the bond is nevertheless invalid.

One of the effects of the rule of constructive liability is that a 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 company's powers but
also those of its officers.

VI. CRITICISM OF DOCTRINE OF CONSTRUCTIVE LIABILITY: EVOLUTION

OF DOCTRINE OF INDOOR MANAGEMENT

The rule of constructive notice has proved too inconvenient for business transaction,
particularly where the directors or other officers of the company were empowered under the
articles to exercise certain powers subject only to certain prior approvals or sanctions of the
shareholders. Whether those sanctions and approvals had actually been obtained or not could
not be ascertained because in real situations, the investors, vendors, creditors and other
outsiders could not dare to ask the directors in so many words about those sanctions having
been obtained or to produce the relevant resolutions. Since, there are no means to ascertain
whether necessary sanctions and approvals have been obtained before a certain officer
exercises his powers which, as per articles, can only be exercised subject to certain approvals,
those dealing with the company can assume that if the directors or other officers are entering
into those transactions, they would have obtained the necessary sanctions. This is known as the
'doctrine of indoor management' and was first laid down in the case of Royal British Bank v.
Turquand.

The Courts in India have also been reluctant in applying the doctrine of constructive liability.
The Allahabad High Court in Dehradun Mussoorie Electric Tramway Co. v.
Jagamanandaradas case rejected the doctrine of constructive liability and the Company was
held liable to the party to the transaction even the directors of the company borrowed the money

7|Page
 which was neither in compliance with the articles nor it was done after obtaining the resolution
in the general body.

The Madras High Court in the case of official Liquidator, Manasube & Co. (P.) Ltd. v.
Commissioner of Police observed that the lenders to a company should acquaint themselves
with memorandum and articles, but they cannot be expected to embark upon an investigation as
to legality, propriety and regularity of acts of directors.

VII. COMMON LAW CASES

The rule of constructive notice was laid down by the House of Lords in Ernest v. Nicholls and
was further explained by House of Lords in Mahoney v. East Hollyford Mining Co case. Lord
Wensleydale in Ernest case took the view that the rules of partnership would apply in the absence
of the doctrine of constructive liability. The objective was to hold the shareholders liable. The
observation of Lord Wensleydale is not clear. However, it appears that he seems to have
considered that it was to avoid this result that the legislature saw fit to require a company to
register articles and so to make available the world information so as to make available to the
world information as to who were the persons authorized to bind the shareholders.

The British Courts in several cases observed that the doctrine of constructive notice has a
potentially drastic effect on outsiders as they were deemed to know about any internal procedures
in the constitution as it is a public document. So, sometimes, even though an action is within the
capacity of the company, it may be outside the powers of the individual representing the
company because an internal procedure was not complied with. For example, in Knopp v. Thane
Investment Limited (2003) the court found the director's failure to observe the articles rendered
a contract contrary to the articles unenforceable. If the doctrine of constructive notice was
applied strictly the outsider could not complain about the lack of authority as they were deemed
to know that there was a limit on the actual authority of the company's agent.

However, the Courts were often keen to mitigate the effect of constructive notice. In Royal
British Bank v. Turquand (1856) an action was brought for the return of money borrowed by
the company. The company argued that it was not required to pay back the money because the
manager who negotiated the loan should have been authorized by a resolution of the general

8|Page
 meeting to borrow but he had no such authorization. As a result of the doctrine of constructive
notice the bank was deemed to know this. The Court held that the public documents only
revealed that a resolution was required not whether the resolution had been passed. The bank
had no knowledge the resolution had not been passed and thus it did not appear on the face of
the public documents that the borrowing was invalid.

VIII. DOCTRINE OF INDOOR MANAGEMENT

The doctrine of indoor management says that if a person enters into a contract with accompany
he has the right to inquire into the correctness of the contract since article and memorandum are
public documents. It is invoked by the person.
The doctrine of indoor management is an exception to the earlier doctrine of constructive notice.
It is important to note that the doctrine of constructive notice does not allow outsiders to have
notice of the internal affairs of the company.

Hence, if an act is authorized by the Memorandum or Articles of Association, then the outsider
can assume that all detailed formalities are observed in doing the act. This is the Doctrine of
Indoor Management or the Turquand Rule. This is based on the landmark case between The
Royal British Bank and Turquand In simple words, the doctrine of indoor management means
that a company's indoor affairs are the company's problem.

Therefore, this rule of indoor management is important to people dealing with a company
through its directors or other persons. They can assume that the members of the company are
performing their acts within the scope of their apparent authority. Hence, if an act which is valid
under the Articles, is done in a particular manner, then the outsider dealing with the company
can assume that the director/other officers have worked within their authority.

IX. EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT

1. Knowledge of irregularity: In case this outsider' has actual knowledge of irregularity

within the company, the benefit under the rule of indoor management would no longer be
available. In fact, he/she may well be considered part of the irregularity.

9|Page
Howard v. patent Ivory co: the directors cannot borrow more than 1000 pound without the
consent of the company's annual. General meeting. Directors borrowed 3500 pound without the
consent of annual general meetings from another directors who took debentures. Now as the
plaintiff is directors than he has the knowledge about the internal irregularity. Held the debenture
is good only for the 1000 pounds only because the plaintiff has the knowledge of the internal
irregularity.

Another Example of the same is, X and Y are two directors of a company. A transfer of shares in
the company had been approved by both X and Y. X was not validly appointed and Y was
disqualified by reason of being the transferee itself. These material facts were known to the
Transferor of the shares; Hence the transfer of shares was not binding and stood ineffective.

2. Forgery
It is pertinent to note that the Doctrine of Indoor Management does not apply in cases where an
outsider relies on a document which is forged in the name of the company. A company can never
be held liable for the forgeries committed by its officers.
For example, In the case of Ruben v. Great Fingall Ltd. The Plaintiff was a transferee of the
share certificate issued under the seal of the defendant company. The certificate was issued by
the Company's secretary who has forged the signature of the two directors of the company and
had affixed the seal of the Company. The plaintiff, in this case, had contended that whether the
signature was forged or genuine comes under the purview of the internal management of the
company, therefore the company shall be held liable for the same, But it was held by the court
that the doctrine of Indoor Management has never extended to cover a forgery. Lord Loreburn
had interpreted that an outsider dealing with companies are not bound to inquire into their indoor
management and will not be affected by any irregularities of which they are unaware of.

3. Negligence
Where an outsider entering into a transaction with a company could discover the irregularities
in the management of the company if he/she would have made proper inquiries, then he/she
cannot seek remedy under the doctrine of Indoor Management. The remedy under this doctrine
is also not available where the circumstances and situations surrounding the contract are so
suspicious that it invites inquiry, and the outsider of the company does not make any efficient
inquiry for the same.

10 | P a g e
For example, in the case of Anand Bihari Lal v. Dinshaw & Co. The Plaintiff had accepted a
transfer of a company's property from the accountant of the company. It was held by the court
that the transfer is void in nature as such a transaction was beyond the scope of the accountant's
authority. It was the duty of the plaintiff to check the power of attorney that was executed in
favour of the accountant by the company.

4. Acts that are beyond the scope of apparent authority

Acts done by an officer of a company which are beyond the scope of its apparent authority will
not make the company liable for any of the defaults caused by the officer. In such a case, the
outsider cannot seek any remedy under the doctrine of Indoor Management simply because
Articles did not delegate the power to the officer to do such acts. The outsider can only sue the
company under the doctrine of Indoor Management if the officer had the delegated power to act
on those grounds.

For example, in the case of Kredit bank Cassel v. Schenkers Ltd., the branch manager of the
company had endorsed a few bills of exchange in the name of the company in favour of a payee
to whom he was personally indebted. The Company did not give him any authority to do so. It
was held by the court that the company was not bound. Additionally, it was also stated that if the
officer of the company commits fraud under his apparent authority on behalf of the company,
then the company will be held liable for the act of fraud committed by the officer.

The same can be observed in Sri Krishna v. Mondal Bros. & Co. The manager of the company
had the apparent authority under the Memorandum and Articles of Associations of the company
to borrow money. The manager borrowed money on a hundi but did not place the same in the
strong box of the company. It was held by the court that the company was bound to acknowledge
the hundi, As the creditor had a bona fide claim for recovering the money on the grounds of
fraudulent acts done by the officer of the company.

11 | P a g e
X. REPRESENTATAION THROUGH ARTICLES

The Articles of association generally contain what is called the power of delegation. In order to
claim protection under this rule and under this kind of exception knowledge of Memorandum
and Articles of Association is essential. A person who did not consult or act according to its
provisions cannot be protected.

This concept is applied in different cases differently by the courts;-

In Lakshmi Rattan lal Cotton Mills v. JK Jute Mills Co, AIR 1957 All 311 the company was
held liable to a loan taken by the managing agent because the articles provided for the delegation
of borrowing powers to the managing agent and it was said that the "delegation clause" was there
in the articles and the person dealing with the company could assume that powers have been
delegated

But what if the person had not consulted the articles of the company and had no knowledge of
the contents of the articles? This question was answered in Houghton & Co v. Northward Lowe
and Wills Ltd, (1927) 1 KB 246. In this case as well there was a delegation clause in the articles
and contract was entered into by a person (a director) who could claim the delegation of the
powers to him, but the plaintiff company had not read the articles of association and had no
knowledge of the delegation clause and hence it was held that the plaintiff company cannot claim
the advantage of the clause of articles which he had no knowledge of at the date of entering into
the contract.

While in Ford Motor Credit Co Ltd V. Harnack (1972) the presumption of the ostensible
authority was held to be a valid ground for binding the company.

12 | P a g e
XI. CONCLUSION

In this conclusion doctrine of constructive notice and indoor management are complementary to
each other. The importance of the doctrine of constructive notice is that it protects the company
from the outsiders, and the importance of the doctrine of indoor management lies in the fact that
it offers protection to the outsiders while dealing with the affairs of the company. The doctrine
of constructive notice comes into the picture when an outsider fails to inquire about the company
whereas the doctrine of indoor management can be invoked by any outsider dealing with the
company.

The turquand and rule has been applied in many cases subsequently and generally in order to
protect the interests of the party transacting with the directors of the company. With the due
course of time several exceptions have also emerged out of the rule like forgery. Negligence,
acts done outside the scope of apparent authority and third party having knowledge of
irregularity etc. if we analyses the cases it is revealed that the revealed that the turquand rule did
not operate in a completely unrestricted manner.

Firstly, it is inherent in the rule that if the transaction in question could not in the circumstances
have been validly entered into by the company then the third party could not enforce it. Secondly
the rule only protects outsiders that is person dealing with the company externally directors,
obviously were they very people who would be expected to know if the internal procedure had
been duly followed.

Actual notice of the failure to comply fully with the internal procedures precluded reliance upon
the rule lastly, an outsiders could not rely upon the turquand rule where the nature of the
transaction was suspicious, for example where the company borrowing powers were the
exercising for purposes which were wholly unconnected with the company business and no
benefit to the company

13 | P a g e