Constructive Notice and Doctrine of Indoor Management

8/18/2019 Constructive Notice and Doctrine of Indoor Management

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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

2!2"#

Damodaram Sanjivayya National law University

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AC%&'(L)D*M)&+

I would like to e,-ress my s-ecial a--reciation and thanks to my adisor/ my

Faculty / who has 0een a tremendous mentor for me. I would like to thank you for

encoura$in$ my research/ adice for the research has 0een -riceless.

I would e,tend my thanks to the 1niersity Authorities/ for -roidin$ me with is

o--ortunity to su0mit my -roect. I am inde0ted to all those who hae hel-ed me

in deelo-in$ this -roect for their su$$estion and $uidance.

Permanika Chuckal

2!2"#

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#able of Contents

Serial

&o.

+o-ic Pa$e &o.

!. List of Cases 3

2. Introduction #

4. Constructie notice 5

3. Statutory 6eform and Constructie &otice "

# )ffects 7

i 1ltra Vires Acts 7

ii Acts 0eyond the authority of directores 8

iii Inconsistent A$reements 8

5. Doctrine of Indoor Mana$ement !

". ),ce-tions to doctrine of indoor mana$ement !3

7. Conclusion 2!

8. 9i0lio$ra-hy 22

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%ist of Cases

• Mahony v. East Holyford Mining Co. :!7"#; L.6. 5 F+.L. 758.

• Kotla Venkata Swami V. Ram Murthi, A.I.6. !843 Mad. #"8.

• TC !td. "ray, !87# !875 .9. #38

• Re, Ham'shire !and Co :!785; 2 Ch. "34

• .!. -nderwood !td. v. ank of !iver'ool :!823; ! %9. ""#.

• Kredit ank Cassel v. S$henkers !td ./ :!82"; %9. 725

• nand ihari !al v. #inshaw Co A.I.6. !832 'udh. 3!"

• Ro/en v. "reat (ingall Consolidated :!85; A.C. 348.

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Introduction

+his Proect is an analysis of the Doctrines of Constructie &otice and Indoor

&otification. +his -roect deles into the nature of the Doctrine of Constructie

notice to understand its im-lications on the commercial world. Doctrine of

Constructie &otice was introduced in the earliest days of the modern

com-anies law. At that time/ the conce-t of limited lia0ility was not yet 0orn and

the insecurity -osed 0y this doctrine to the creditor/ was 0alanced 0y the risk of

the shareholders in incurrin$ unlimited lia0ility. ?oweer/ with the arrial of

Limited lia0ility/ the udiciary constantly has tried to 0y-ass or do way with this

doctrine com-letely.

Constructie notice is the le$al fiction that si$nifies that a -erson or entity

should hae known/ as a reasona0le -erson would hae/ een if they hae no

actual knowled$e of it. For e,am-le/ if it is not -ossi0le to sere notice

-ersonally then a summons may 0e -osted on a court house 0ulletin 0oard or

le$ally adertised in an a--roed news-a-er. +he -erson is considered to hae

receied notice een if they were not aware of it.

In com-anies law the doctrine of constructie notice is a doctrine where all

-ersons dealin$ with a com-any are deemed to hae knowled$e of the

com-any@s articles of association and memorandum of association. +he doctrine

of indoor mana$ement is an e,ce-tion to this rule. In India the rule was neer

too strictly a--lied 0ut continues to -ersist.

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Constructive Notice

After 0ein$ re$istered with the 6e$istrar of Com-anies/ the memoranda and

articles 0ecome -u0lic documents and may 0e ins-ected 0y any on -ayment of the

-rescri0ed fee. 'n account of it/ eery -erson dealin$ with the com-any ise,-ected to hae read and understood the Contents of the documents 0efore

makin$ any contract with the com-any and if he does not he will hae to 0ear its

conseuences. +hus/ a -erson dealin$ with a re$istered com-any is -resumed not

only to hae read the -u0lic document like memorandum/ articles and other

re$ulations which form the constitution of the com-any 0ut also to hae

understood them accordin$ to their -ro-er meanin$.! (hether he has read these

documents or not/ he is -resumed to hae notice of their contents.2

In the case of Mahony v. East Holyford Mining Co.4 Lord ?ather0y said B)ery

oint stock com-any has its memorandum and articles association o-en to all who

are minded to hae any dealin$s whatsoeer with the com-any/ and those who so

deal with them must 0e effected with notice of all that is contained in those two

documents.

It is to 0e noted that a -erson dealin$ with a re$istered com-any is -resumed not

only to hae the notice of the com-anys -owers 0ut also the Powers of its

officers.3

It is also nota0le that such -resum-tion cannot 0e inferred in res-ect of all kinds

of documents/ re$istered with the com-anyE for the -ur-ose such documents may

0e diided into two $rou-s

:a; the documents affectin$ the -owers of the com-any and its a$ents/ and

:0; other documents/ i.e./ the documents not affectin$ the -owers to the

com-any and its a$ents.

A -erson dealin$ with a re$istered com-any is -resumed to hae read and

understood the -u0lic documents affectin$ the -owers of the com-any and its

!*riffith . Pa$et/ 5 Ch. D. #!" 'ak0ank 'il Co. . Crum/ 7 A--. Cas. 5#E *.I. = C. Com-any/L.6. " ). 28E Country *loucester 9ank . 6udry/ etc. Co./ :!78#; ! Ch. 528E 'wen andAshworths Claim/ :!8!; Ch. !!#

2 %redt 9ank Cassed . henkers/ :!82"; ! %.9. 725.

4 :!7"#; L.6. 5 F+.L. 758.

3 9aron Parke in 6idely . Portsmouth *rindin$ Ch./ :!737; 2 ),. Ch. "!!.

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officers/ e.$. memorandum/ articles and s-ecial resolution/ etc/ # 0ut cannot 0e

-resumed to hae read and understood the documents not affectin$ the -owers of

the com-any and its officers/ e.$./ 0alance sheet/ accounts and return etc. 5

An a--lication of the doctrine of constructie notice is found in the case of Kotla

Venkata Swami V. Ram Murthi/" also. In this case/ the articles reuired all the

deeds to 0e si$ned 0y the mana$in$ director/ the secretary and a workin$ director

on 0ehalf of the com-any 0ut a deed of mort$a$e was sin$ed only 0y the secretary

and a workin$ director and the deed was acce-ted 0y the -laintiff. +he -laintiff

was not entitled to enforce it 0ecause if she :the -laintiff; had read the articles/ she

would hae discoered that a deed such as she took reuired e,ecution 0y three

s-ecified officers of the com-any and would hae refrained from acce-tin$ a deed

inadeuately si$ned.

Statutory reform and Constructive notice

In the o-inion of some le$al e,-erts the doctrine of constructie notice is

considered as an unreal doctrine. +his doctrine is not 0ased on realities of 0usiness

of life. A com-any is known to the -u0lic at lar$e throu$h its officers and not

throu$h its Memorandum and Articles of Association. +he doctrine of constructie

notice has 0een a0olished 0y Section 8 of the )uro-ean Communities Act/ !8"2.

?oweer/ Section 8 of the said Act is now incor-orated in Section 4# of the

:)n$lish; Com-anies Act/ !87#. +he effect of new Proision has 0een shown in

TC !td. "ray.0(here a de0enture issued 0y a com-any was not si$ned 0y the

director -ersonally as reuired 0y the terms of Articles/ in fact it was si$ned 0y a

solicitor as attorney of a director. +he Articles of com-any contains the -roision

that Beery instrument to which the seal shall 0e affi,ed shall 0e si$ned 0y a

director. It was held that een so the com-any was held lia0le. +he Court while

considerin$ the effect of new -roision said that 0efore this enactment was

# After 0ein$ re$istered with the 6e$istrar/ a s-ecial resolution 0ecomes a -u0lic

document affectin$ the -owers of the com-any and its officers

5 +hey are filed with the 6e$istrar only for record and their -ur-ose is merely to

-roide information of the financial -osition of the com-any

" A.I.6. !843 Mad. #"8.

7 Financial +imes/ &o. 2"/ !87# !875


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enforced a -erson dealin$ with the com-any was reuired to $o throu$h the

Memorandum and Articles of the com-any to satisfy himself that the transaction

was within the cor-orate ca-acity/ 0ut the scenario has 0een chan$ed 0y irtue of

Section 8:!;. +his Section 8:!; states that $ood faith is to 0e -resumed and that the

-erson dealin$ with the com-any is not 0ound to enuire.

+he doctrine of constructie notice has not 0een taken so seriously 0y the

courts in India. For illustration/ in #ehradun Mussouri Ele$tri$ Tramway Co. v.

%agrnandardas/8 as -er articles/ the directors could dele$ate all their -owers

e,ce-t the -ower to 0orrow. )en so an oerdraft taken 0y the mana$in$ a$ents

without a--roal of the 0oard was herd to 0e 0indin$. +he Allaha0ad ?i$h Court

said that such tem-orary loans must 0e ke-t 0eyond the sco-e of releant

-roision.

*ffects.G+he effect of the doctrine of constructie notice may 0e summed u- as

follows

!. Ultra +ires ,cts :-

Accordin$ to the doctrine of constructie notice/ eery -erson dealin$ with the

com-any is -resumed to hae the knowled$e of the contents of memorandum and

therefore if an act is ultra ires the com-any/ he cannot claim relief on the $round

that he was unaware of the fact that the act is 0eyond the memorandum :i.e./ ultra

ires the com-any;. In )n$land/ S. 8:!; of the )uro-ean Communities Act/ !8"2/

has chan$ed the -osition with effect from !G!G!8"4 to the effect that a transaction

which is ultra ires the com-any will 0e H0indin$ on the com-any and the

com-any cannot -lead that it has acted ultra ires or the transaction is ultra ires

-roided the outsider dealin$ with the com-any has acted in $ood faith and the

transaction has 0een decided u-on 0y the com-anys 0oard of directors. ?oweer/

there is no such le$islation in India and conseuently in India/ the outsider dealin$

with the com-any is -resumed to hae the knowled$e of the contents of the

memorandum and therefore if an act is found to 0e ultra ires/ he cannot claim

relief on the $round that he had no knowled$e that the act was 0eyond the

memorandum and/ therefore/ ultra ires.

8 A.I.6. !842 All. !3!E See also Charnock Collieries Ltd. . 9holanath/ I.L.6.

:!8!2; 48 Cal. 7! arid Pro0odh Chandra . 6oad 'ils :India; Ltd./ I.L.6/. :!828;#" Cal. !!!

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"/ ,cts beyond t0e aut0ority of directors/1

If this lack of authority of the directors or other a$ents of the com-any is eident

from the -u0lic documents like articles and other re$ulations/ the -erson dealin$

with the com-any will 0e -resumed to hae the notice of the lack of authority and

therefore he cannot hold the com-any 0ound 0y the act of the directors :or other

a$ents;. For e,am-le/ if the articles reuire a 0ill to 0e si$ned 0y two directors/ a

-erson dealin$ with the com-any is under duty to see that it has 0een si$ned 0y

the two directors/ otherwise he cannot enforce the 0ill a$ainst the com-any. 9ut if

the lack of authority of the directors or a$ents is not eident from the -u0lic

documents/ he cannot 0e -resumed to hae the notice of the lack of authority and

therefore he can hold the com-any 0ound 0y the act of the directors or other

a$ents if he honestly thinks that the director or a$ent with whom he is ne$otiatin$

is authoried to act on 0ehalf of the com-any. For e,am-le/ where the articles

reuire the directors to take the consent of the shareholders 0y ordinary resolution

for e,ercisin$ thereof 0orrowin$ -owers 0ut they 0orrow money without takin$

such consent the 0orrowin$ will 0e 0indin$ on the com-any if the creditor has no

notice of the fact the directors ne$otiatin$ with him hae not taken such consent.

4.Inconsistent agreements G

Person dealin$ with the com-any is -resumed to hae the notice of the contents of

articles and conseuently he cannot make a contract with the com-any which

-ur-orts to oerride any ri$hts created 0y the articles.

+he doctrine of constructie notice -rotects the com-any 0ut not the outsiders

dealin$ with the com-any. Sometimes the doctrine creates much hardshi-s for the

outsiders. +hey are -resumed to hae the knowled$e of the -u0lic documents like

the memorandum of the com-any 0ut in -ractice it is ery difficult and time

consumin$ to hae the com-lete knowled$e of them 0efore makin$ any contract

with the com-any. +hus/ the doctrine is inconenient and unreal. It has failed to

take note of the realities of 0usiness life. 'n account of its eils the doctrine has

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not 0een taken seriously 0oth in 1.%. and India !. In )n$land the doctrine has

0een a0ro$ated 0y the )uro-ean Communities Act. !88". !!

+he doctrine of constructie notice is su0ect to the followin$ doctrines

I. Doctrine of Indoor Mana$ement

II. Doctrine of ?oldin$ out

I/ Doctrine of Indoor Management"

+he doctrine of constructie notice is su0ect to the doctrine of indoor

mana$ement. Accordin$ to the doctrine of indoor mana$ement/ an outsider

dealin$ with the com-any is reuired to see that the authority of dealin$ had 0een

$ien 0y the articles to the -erson with whom the outsider is dealin$ 0ut he cannot

0e assumed to do anymoreE he is not e,-ected to enuire whether the -ro-er

-rocedure has 0een followed for the dele$ation of the authority to the -erson with

whom the outsider is dealin$E!4 he may 0e -resumed to hae the knowled$e of the

constitution of the com-any 0ut not what may or may not hae taken -lace within

indoors which are closed to him.!3 +he doctrine entitles the outsider dealin$ with

the com-any to assume that the thin$s hae 0een done in accordance with the

-roisions and -roceedin$s stated in the articles. +hus/ eery outsider is entitled to

assume the re$ularity of internal -roceedin$s unless he has the knowled$e of the

irre$ularity. +he doctrine im-lies res-onsi0ility on the -erson in char$e on the

mana$ement of the com-any to see that all the rules of internal mana$ement of a

com-any are com-lied with and the com-any will he lia0le to the outsider for the

ac of his directors or a$ents een if the internal formalities or internal -rocedures

hae not 0een com-lied with. An e,am-le will make the -oint more clear. If the

! Dehra Dun Mussoorie )lectric +ramway Co. V.


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articles $ie -ower to the mana$in$ a$ent of the com-any to 0orrow money with

the a--roal of directors 0ut the mana$in$ a$ent 0orrows without such a--roal/

the lender will not 0e affected 0y such irre$ularity/ he may -resume that 0efore

0orrowin$/ the mana$in$ a$ent has taken the a--roal of the directors and

conseuently the com-any will 0e 0ound 0y the loan. ?oweer/ if the lender has

the knowled$e of the irre$ularity/ the -osition would 0e uite different. +he lender

will not 0e -rotected the -osition would 0e uite different. +he lender will not 0e

-rotected and conseuently the loan will not 0e 0indin$ on the com-any.!#

+he o0ect of this doctrine is to -rotect the outsider with a com-any. +he

doctrine is 0ased on 0usiness conenience for 0usiness could not 0e carried on if

eery0ody dealin$ with the a--arent a$ents of a Com-any was com-elled to call

for eidence that all internal re$ulations had 0een duly o0sered.!5Since

memorandum and articles are -u0lic documents o-en to -u0lic ins-ection/ an

outsider is -resumed to hae the knowled$e of their contents/ 0ut the details of

internal -rocedure are not o-en to -u0lic ins-ection and therefore it would 0e

unfair if an outsider dealin$ with the Com-any is -resumed to hae the knowled$e

of the details of internal -rocedure :i.e. the rules of internal mana$ement;.

+he doctrine was first deelo-ed in the case of Royal ritish ank v.

Tur&uand.12 +he doctrine of indoor mana$ement is also known as rule in

+uruands case. In this case/ the directors were em-owered 0y its re$istered deed

of settlement!7 to 0orrow on 0ond such sums as should 0e authoried 0y a $eneral

resolution -assed at $eneral meetin$ of the com-any. +he com-any 0orrowed

money and issued a 0ond si$ned 0y two directors under the seal of the com-any.

(hen the lender sued on the 0ond/ the com-any contended that there had 0een no

resolution authoriin$ the loan and therefore the 0ond was $ien without authority

:i.e./ the 0orrowin$ was unauthoried; and conseuently it was not 0indin$ on the

com-any. +he Court reected the contention of the com-any and held the com-any

0ound 0y the loan :or 0ond;. ?ain$ ascertained that 0orrowin$ mi$ht 0e

!# 9alasara (athi Ltd. V. A. Parmeshwar/ A.L6. !8#" Mad. !22.

!5 Palmers Com-any Law/ P. 45.

!" :!7#5; 5 ).P. = 9. 42".

!7 1ntil !752 memorandum and articles were found in one document called theBdeed of confinement

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authoried 0y a resolution of the com-any/ the -laintiff :the lender; had ri$ht to

assume that the necessary resolution had 0een -assed. +he doctrine of indoor

mana$ement deelo-ed in the case of Royal ank v. Tur&uand is 0ased on reason

and ustice. It has 0een a--lied 0y the courts in a num0er cases to secure ustice.

+he cases in which the doctrine has 0een a--lied may discussed under the

followin$ heads.!8

4a5 Cases where directors title to office is defectie

Any transaction entered into or act done on 0ehalf of com-any 0e de facto

directors will 0e 0indin$ on the com-any een thou$h a--ointment of such

directors is found defectie -roided the outsider dealin$ with the com-any has no

knowled$e of it 0ecause the outsider is entitled to -resume that the directors

dealin$ with him hae 0een -ro-erly a--ointed.2 )en if de facto directors hae

neer 0een a--ointed2! their act done on 0ehalf of the com-any will 0e 0indin$ on

the com-any if they are in control of 0usiness of the com-any and the outsider is

unaware of the fact that the director hae 0een a--ointed.22

4b5 Failure to hold -ro-erly conened meetin$s

Directors are reuired to e,ercise their -ower collectiely 0y resolin$ at -ro-erly

conened meetin$s of the 0oard of directors that acts shall 0e done in the name of

!8 Pennin$tons Com-any Law :+hird )d.; P. !!3

2 Sec Pudurnec = Co. / Moos/ A.I.6. !825 9om. 27E P.C. Mitra . 6oad 'il

:India; Ltd./ :!828; I.I..6. #" Cal. !!!2! Muhni . Iast

*aluniinco./:!8!; 2 %.9. 4!3E 6e/ Country Lift Assurance Co./ :!7"; . S Ch. A--.

277E Im-erial 'il and

*eneral Mills . (ain Sin$h/ A.I.6. !8l# Lah. 3"7E Sree Minakshi Mills . Callianee/ A.I.6.

!84# Mad/. "88.

22 Sec Mahony . )ast ?olyford Minin$ Co./ :!7"#; L.6. " ?.L. 758. For critical

study of Indian cases/ see P.S.. San$al 6oyal 9ritish flunk V. +uruand and IndianLaw :!853; ! Com-. L.6. !!".

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the com-any. 9ut sometimes it is found that a transaction entered into 0y one or

some of the directors in the name of the com-any has not 0een a--roed 0y a

resolution -assed at a re$ularly conened 0oard meetin$. (e will consider here

the fate of such transaction.

In short the -osition of law a--ears to 0e that the act done on 0ehalf of com-any

0y the directors will 0e 0indin$ on the com-any een if the meetin$ of the 9oard

was irre$ular as no -resent or -ro-er notice of the meetin$ of the 0oard was $ien

in adance to each director/24 -roided the outsider dealin$ with the com-any is

still -rotected 0ecause he is -resumed to hae the knowled$e of the num0er of

directors who from uorum/ 0ut he is not reuired to see that the num0er of

directors in fact attended the 0oard meetin$23 and this is lo$ical 0ecause een

thou$h the outsider knows what num0er of directors should attend he had so

means of ensurin$ that num0er actually did attend.2#

Similarly an act done 0y the directors in the name of the com-any will 0e 0indin$

on the com-any een if the act has 0een done without a 0oard meetin$ 0ein$ held

at all/ -roided the outsider dealin$ with the com-any has no knowled$e of it.25 Its

reason is that the outsider has no means to discoer whether a 0oard meetin$ has

0een -ro-erly held. +hus a de0enture/ which was issued under the seal of the

com-any/ was held 0indin$ on the com-any/ een thou$h no 0oard meetin$ to

sanction its issue was held at all.

4c5 Disre$ard of limitations on the directors authority 2"

+he doctrine of indoor mana$ement also -rotects an outsider dealin$ with the

com-any in a condition where the directors hae authority under the

memorandum and articles of the com-any with the limitation that they should

24 9rotone . La +rinidad/ :!77"; 4" Ch. D. !

23 Prince of (ales Assurance Society V. Athenaeum Assurance Society/ :!7#7; 4

C.9.&.S. "#5/ Dais . 6. 9oltom = Co./ :!783; 4 Ch. 5"7.

2# Pennin$ton/ HCom-any Law/ :+hird edn.; -. !!7

25 Dais . 9oltom = Co. :!783;/ 4 Ch. 5"7 Duck V. +owerin$ *alaniin$ Co.

:!8!; 2 %9. 4!3.

2" For detailed study/ see P.S. San$al/ 6oyal 9ritish 9ank / +hruand = Indian

Law/ :!853; 2 Com-. L.


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e,ercise their authority if certain conditions are fulfilled or a s-ecial -rocedure is

followed 0ut they e,ercise their authority without fulfillin$ the conditions or

followin$ the s-ecific -rocedure. In other words/ the act done 0y the directors who

hae authority to do the act after fulfillin$ certain conditions or followin$ a

s-ecific -rocedure will 0e 0indin$ on the com-any een if the conditions hae

not fulfilled or the -rocedure has not 0een followed/ -roided the outsider has o

knowled$e of the fact that the conditions hae not 0een fulfilled or the -rocedure

has not 0een followed. Its reason is that the outsider may 0e -resumed to hae

knowled$e of the conditions reuired to 0e fulfilled or -rocedure reuired to 0e

followed 0efore the e,ercise of the -ower 0ut he cannot 0e -resumed to hae

wlcd$e of the fact that the conditions hae not 0een fulfilled or the -rocedure has

not 0een followed. ?e has no means of knowin$ that the conditions or -rocedure

-rescri0ed 0y the memorandum or articles hae actually 0een adhered or not. +he

0est illustration is found in +uruands case which facts hae 0een stated a0oe.

In Ham'shire !and Co.27/ it has 0een held that if the directors hae authority to

0orrow money on 0ehalf of the com-any u- to a certain limit s-ecified in the

articles and also in e,cess of the limit if a $eneral meetin$ of the com-any

consents/ the 0orrowin$ in e,cess of the s-ecified limit will 0e on the com-any

een if the necessary consent has not 0een taken -roided the lender is unaware of

the fact that the necessary consent has not 0een taken. Its reason is that the lender

is entitled to assume that the necessary consent has 0een taken 0efore the

0orrowin$ in e,cess of the limit.

In ritish Thomson Houstom Com'any !td. v. (ederal Euro'ean ank !td .28/ 0y

articles/ the directors were em-owered to dele$ate one or more or their own 0ody

such of the -owers conferred on the directors as they consider reuisite for

carryin$ on 0usiness of the com-any and to determine who should 0e entitled to

si$n on the com-anys 0ehalf 0ills/ recei-ts/ acce-tances/ contracts and

documents. &. Pal/ one of the directors/ e,ecuted a $uarantee. +he com-any

contended that the director had no authority to e,ecute the $uarantee and therefore

27 :!785; 2 Ch. "34.

28 :!842; 2 %.9.""E See also Dey . -ullin$er )n$ineerin$ Co./ :!82; ! %.9. ""/

9i$$er Staff . 6owatts (arJ Ltd./ :!785; 2 Ch. 84E Mercanfile 9ank of India .

Chartered 9ank of India/ Australia and China and Strauss = Co./ :!8"4; ! All ).24!.

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it was not 0ound 0y it. +he Court held that the com-any was lia0le on the

$uarantee 0ecause the -laintiff was entitled to assume that &. Pal had 0een

authoried 0y the directors to si$n a contract on 0ehalf of the com-any.

*6ce7tions to t0e doctrine of indoor management

+he doctrine of indoor mana$ement or rule in +uruaflds case does not a--ly in

the conditions mentioned 0elow

/ Notice of irregularity:

+he doctrine of indoor mana$ement or the rule of +uruands case does not a--ly

if the -arty affected 0y an irre$ularity may 0e taken to hae ow!ed$e of suchirre$ularity if he was himself a -arty to the internal mana$ement.

In Howard v. )atent *vory Manufa$turing Co34. the articles em-owered the

directors to hotGrow u- to -ounds ! and such further sums as the $eneral

meetin$ mi$ht authorie. +he com-any 0orrowed -ounds 4/# from the directors

without the authority of the $eneral meetin$ and issued de0entures to them. +he

Court held that the de0entures were alid to the e,tent of -ounds ! only. Since

the directors were themseles -arty to the internal -roceedin$s they were taken to

hae the notice of the fact that the necessary resolution had not 0een -assed and

therefore they could not 0e -rotected 0y the rule in +uruand@s case :or the

doctrine of indoor mana$ement;.

?oweer/ in Hely+Hut$lunson V. rayhead !td .4! the a0oe men -rinci-le/ that a

-erson who is a -arty to the internal mana$ement will 0e deemed to hae the

knowled$e of the irre$ularity of internal -roceedin$s :if any;/ has not 0een strictly

followed. +he Court held that a -erson cannot 0e deemed to hae the knowled$e

of the irre$ularities of internal mana$ement merely 0ecause he is a director and

conseuently a -art of the internal machinery.

?oweer/ the iew that a -erson who is himself a -art of internal/

machinery should 0e deemed to hae knowled$e of the irre$ularity of internal

mana$ement a--ears to 0e more correct and -ractical.

4 :!777; 47 Ch. P. !#5E See also +yne Mutual Steamshi- Insurance Association

. 9rown/ :!785; "3 L.+. 274E Morris . %ansen/ :!835; A.C. 3#8.

4! :!855; ! >.9. #38.

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+he -rinci-le that a -erson dealin$ with the com-any will not 0e -rote!

he has knowled$e of the irre$ularity/ is not confined only to -ersons dealin$ with

the com-any 0ut e,tend to the cases where one com-any has dealin$ with another

com-any. +hus/ where a com-any dealin$ with another com-any affected 0y the

irre$ularity in the internal mana$ement of the other com-any/ it cannot 0e

-rotected under the rule in +uritands case if it had notice of the

irre$ularity.42'rdinarily/ a com-any is not automatically deemed to hae the

knowled$e of the irre$ularity in the internal mana$ement of the com-any with

which it is dealin$ merely 0ecause it has a common officer :as director or

secretary; with that other com-any/ 0ut the com-any may 0e -resumed to hae the

knowled$e of the irre$ularity if the common officer had some duty im-osed u-on

him to communicate the knowled$e to the other com-any/ and had some duty

im-osed u-on him 0y the com-any which is alle$ed to 0e affected 0y the notice to

receie the notice.44

In Re, Ham'shire !and Co35. , the directors of a com-any were em-owered

to 0orrow money on 0ehalf of the com-any 0ut not 0eyond a certain limit without

the consent of a $eneral meetin$. +he directors 0orrowed 0eyond this limit and a

$eneral meetin$ $ae the reuired consent/ 0ut the notice summonin$ the meetin$

did not state that the 0orrowin$ to 0e authoried was 0eyond the limit. +he

secretary of the com-any 0orrowin$ the loan was also the secretary of the society

lendin$ the com-any and he knew of the irre$ularity. +he Court held that the

knowled$e acuired 0y the secretary as officer of the com-any could not 0e

im-uted to the Society 0ecause he was under no duty to communicate it to the

society and no duty was im-osed on him 0y that society to receie it. +hus/ the

0orrowin$ was 0indin$ on the recoer it com-any and society :lender; was

entitled to recoer it.

42 +.6. Pratt Ltd. . Sasson = Co. Ltd./ 4" 9orn. L.6. 8"7.

44 6e/ Marseilles ),tension 6ly./ :!8"!; L.6. " Ch. i5iE *ale . Lewis/ 8 >.9. "4 6e/

?am-shireLand Co./ :!785; 2 Ch. "34E Koun$ . Daid Payne = Co./ :!73; 2 C% 57E

6e/ Fenwick Sto0art

= Co./ :!88; ! Ch. #5.

43 :!785; 2 Ch. "34E See also Fenwick/ Sto0art = Co. Ltd./ :!82; ! Ch. #5

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"/ Sus7icious circumstances inviting in8uiry:

+he doctrine of indoor mana$ement does not a--ly where the -erson

seekin$ to rely on it is -ut on inuiry in circumstances under which he would hae

discoered the irre$ularity if he had made inuiries.

In .!. -nderwood !td. v. ank of !iver'ool /4# a sole director of a

com-any -aid into his own account cheues drawn in faour of the com-anyE the

0ank collected the cheues and credited him with the -roceeds. +he 0ank was

sued 0y the com-any on 0ehalf of a de0entureGholder claimin$ dama$es for

conersion. +he 0ank was held lia0le and it was not -rotected under the rule in

+uruafldS case 0ecause the fact that the director had -aid the cheues drawn in

faour of the com-any into his -riate account was so unusual to -ut the 0ank on

inuiry and the 0ank was ne$li$ent in failin$ to make -ro-er inuiries.

It is nota0le that if the act of an officer of a com-any is such as would

ordinarily 0e 0eyond the -owers of such officers/ the act will not 0e 0indin$ on the

com-any merely 0ecause under the articles of the com-any/ -ower to do the act

could hae 0een dele$ated to him. +he fact that the act is 0eyond the a--arent

authority of such officers is sufficient to -ut the -laintiff on inuiry to ascertain

whether the officer has in fact 0een $ien the authority to do the act. in such a

case/ the act will 0e 0indin$ on the com-any only if the -ower to do the act has

actually 0een dele$ated to the officer/ i.e./ if the officer has actual authority to do

the act on 0ehalf of the com-any.

In Kredit ank Cassel v. S$henkers !td ./45 certain 0ills of e,chan$e were

drawn in the name of the defendant com-any :who were forwardin$ a$ents; 0y its

0ranch mana$er who had the authority to draw 0ills on 0ehalf of the com-any. +he

0ills so drawn were not 0indin$ on the defendant com-any 0ecause the drawin$ of

0ills was not within the a--arent or ostensi0le authority of the 0ranch mana$er

and conseuently the -laintiff was under duty to inuire as to the authority of the

0ranch mana$er to draw the 0ills on 0ehalf of the defendant com-any. +he

defendant com-any would hae 0een 0ound if it 0ad $ien him actual authority to

4# :!823; ! %9. ""#.

45 :!82"; %9. 725.

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draw 0ills on its 0ehalf 0ut in this case/ no such authority was $ien to the 0ranch

mana$er and conseuently the defendant com-any was not lia0le on the 0ills.

Similarly/ in nand ihari !al v. #inshaw Co.32 an accountant of the

com-any without authority transferred the -ro-erty of the com-any to the

-laintiff. +he transfer was held to 0e oid for it is not within the a--arent authority

of the accountant to transfer the -ro-erty of the com-any. +he transfer would hae

0een the defendant com-any f it had $ien the accountant actual authority to

transfer its -ro-erty 0ut since no such authority was $ien to the accountant the

transfer was not 0indin$ on the com-any.

$/ 9orgery:

+he doctrine of indoor mana$ement does not a--ly where the act/ done in

the name of the com-any are oid a0 initio. +hus/ if the document on which the

-erson seeks to rely is a for$ery the doctrine of indoor mana$ement will not 0e

a--!ica0le.

In Ro/en v. "reat (ingall Consolidated 30/ the uestion arose whether the com-any

was 0ound 0y a short certificate to which the com-anys seal had 0een affi,ed 0y

the com-any@s secretary without authority and the for$ed si$natures of two

directors were added. In this case/ the share certificate was issued 0y com-anys

secretary who had for$ed the si$natures of two directors and affi,ed the seal of the

com-any without any authority/ It was held that the com-any was not 0ound 0y

the share certificate 0ecause it was for$ed and/ therefore/ a Lord Lore 0urn has

o0sered that the doctrine of indoor mana$ement a--lies only to irre$ularities that

otherwise mi$ht affect a $enuine transaction/ 0ut it cannot a--ly to a for$ery.

?oweer/ a com-any may 0e 0ound een 0y a for$ed document on the

$round of holdin$ out or esto--el. A com-any may 0e esto--ed from relyin$ on

the fact of for$ery if the for$ed document has 0een re-resented as $enuine 0y

officer or a$ent of the com-any hain$ actual or ostensi0le authority to do so.48

+hus as +hom-son has o0sered/ the com-any will 0e 0ound een 0y a for$ed

document if the com-any re-resents that the for$ed instrument is $enuine 0ecause

4" A.I.6. !832 'udh. 3!".

47 :!85; A.C. 348.

48 Sealy/ L.S. Cases and Materials on Com-any Law/ -. 2".

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in such a case it will 0e esto--ed from denyin$ that for$ed instrument is $enuine

as a$ainst an outsider who has relied to his detriment u-on the re-resentation.3

9esides/ a com-any will also 0e 0ound 0y a for$ed document -roided the

outsider -leadin$ esto--el a$ainst the com-any has relied on the for$ers a--arent

authority to e,ecute the instruments. +hus/ where a director who has ostensi0le

authority to 0orrow money under its memorandum and articles commits fraud of

the com-any 0y not -lacin$ the money 0orrowed 0y him on 0ehalf of the

com-any/ the 0orrowin$ will 0e 0indin$ on the com-any -roided the lender is

0ona fide and thus the com-any cannot 0e allowed to refuse the -ayment of the

loan on the $round of the fraud of its own officer .3!

&/ No nowledge of t0e contents of articles :

Sometimes articles contain a Bdele$ation clause -roidin$ that the 0oard of

directors can dele$ate its authority to an indiidual director. If an outsider dealin$

with the com-any has the knowled$e of dele$ation clause/ he may assume that the

-ower of dele$ation has 0een e,ercised and the director enterin$ into contract with

him on 0ehalf of the com-any has 0een dele$ated authority to make such contract.

+he actual dele$ation 0ein$ a matter of internal mana$ement! he is &ot 0ound to

enuiry as to whether the authority has actually 0een dele$ated to the director or

not.32

?oweer/ the most controersial issue is whether an outsider enterin$ into

a contract with an indiidual director -ur-ortin$ to act on 0ehalf of his com-any

without hain$ the knowled$e of such dele$ation clause at the time of makin$

such contract can also assume that the -ower of dele$ation has 0een e,ercised and

the director has 0een dele$ated the authority to make such contract on 0ehalf of

the com-any.

Accordin$ to one iew34 he is not entitled to assume so. For e,am-le/ in the case

of Rama $or'oration v. )roved Tin and "eneral *nvestment Co55./ the of the

defendant com-any contained a Hdele$ation clause -roidin$ that the directors

3 Andrews 6. +hom-son/ Com-any Law Doctrine and the Authority to Contract/

:!8##G#5; !! +oronto Law /


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may dele$ate any of their -owers/ other than the -ower to 0orrow and make calls/

to committees consistin$ of such mem0ers of their 0ody as they think fit. 9ut in

fact the 9oard of Directors had not dele$ated any of their -owers. A director of the

defendant Com-any entered into a contract with the -laintiff com-any to

-artici-ate in a oint enture concernin$ the sale of a tele-hone directory 0ut he

did not disclose to the 9oard anythin$ a0out the contract. +he -laintiff com-any

had no knowled$e of the dele$ation clause at the time when the ntract was

entered into. +he defendant com-any re-udiated the contract. +he -laintiff

com-any tried to enforce the contract on the stren$th of Hdele$ation clause in the

articles of the defendant com-any. +he Court held the -laintiff com-any was not

0ound 0y the a$reement. Since the -laintiff com-any had no knowled$e of the

Hdele$ation clause when the contract was entered into/ it was not entitled to

assume that the -ower of dele$ation had 0een e,ercised and the director enterin$

into the contract had 0een dele$ated an authority to do so. Its reason is that rule in

+uruarids case or the doctrine of indoor mana$ement is 0ased on the -rinci-le of

esto--el and/ therefore/ where a -erson has knowled$e of articles/ he can assume

that the officer o-enly e,ercisin$ the authority has 0een dele$ated such authority

and the com-any can 0e esto--el from alle$in$ that the officer was not in fact so

authorised.3# +he iew does not a--ear to 0e more correct 0ecause an outsider

dealin$ with the com-any is deemed to hae constructie notice of the articles and

also 0ecause een if he had consulted the articles/ he would not 0e a0le to know

whether the director had actually 0een dele$ated the authority.

+he 0etter iew is that if an outsider dealin$ with the com-any entered into

a contract with an indiidual director of the com-any -ur-ortin$ to act on its

0ehalf and the contract is within the a--arent or ostensi0le authority of the

director/ the contract will 0e 0indin$ on the com-any een if the outsider had no

34 ?ou$htion = Co. . &orhard/ Lowe and (ills Ltd./ :!82"; !%9. 235E 6ama

Cor-oration.Proed +in and *eneral Inestment Co./ :!852; 2 >.9. 3"/ +he iew of

Mukeri/


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knowled$e of the articles of the com-any when he contracted with the director/

unless it is -roed that the com-any under its memorandum or articles/ had no

ca-acity either to make such contract or to dele$ate the authority to make such

contract to the director .35

35 9ritish +hom-son ?ouston Co. . Federated )uro-ean 9ank Ltd./ :!842; 2 %


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Conclusion

+he rule of constructie lia0ility is a unrealistic doctrine. It is an ima$inary

doctrine and is a fiction created 0y the udicial -ronouncement of the Courts.

Innumera0le -arties enter into a num0er of contracts in eeryday 0usiness of thecom-any. +his doctrine e,-ects each and eery outsider not only to know the

documents of the com-any 0ut also -resume to understand the e,act nature of

documents/ which is -ractically not -ossi0le. In reality/ the com-any is not known

0y the documents 0ut 0y the -eo-le who re-resent it and deal with an outsider.

+he outsiders do the 0usiness and enter into contracts not always on the 0asis of

documents of the com-any 0ut the $oodwill and the re-utation of the directors or

officers who are re-resentin$ the com-any.

+his is the reason why the 9ritish Courts and Indian Courts hae shifted its

a--roach in dealin$ with the cases relatin$ to the outsider of the com-any. +he

Indian Courts hae not $ien much im-ortance to this doctrine. +he )uro-ean

Communities Act has also a0ro$ated the conce-t of constructie notice 0y

0rin$in$ Section 8 of the Act which reco$nies the conce-t of $ood faith in

0usiness transaction. +his -roision is in the tune of the reality of the 0usiness

transaction/ where the outsiders of the com-any enter into the arious contracts

not on the 0asis of the documents of the com-any 0ut on the $ood faith of the

com-any.

+his is the reason why the courts hae eoled the doctrine of indoor

mana$ement as an o--osite to the doctrine of constructie notice in order to

-rotect the interests of the outsiders.

+he researcher on the 0asis of the arious commentaries on the su0ect and the

cases decided 0y the 9ritish Courts and Indian Courts is of iew that merely

re$istration of a com-any should not constitute the notice of the documents

su0mitted to the re$istrar. Also/ an outsider should always hae the freedom to

make some assum-tion which a reasona0le -erson may infer into the -articular

circumstances.

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;ibliogra70y

#able of ;oos:

!. 9oyle and 9irds Com-any Law/ :!st

Indian 6e-rint/ !88";

2. Dr.S.C +ri-athi/ Modern Com-any law/:!st edition;

4. *ower and Daies Princi-les of Com-any law :7th

edn./ Paul L. Daies

ed./ 27;

3. Palmers Com-any Law/ :2!st

)dn./ C.M. Schmitthoff =


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Constructive Notice and Doctrine of Indoor Management

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