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TMI BlogDISTINCTION BETWEEN ‘DOCTRINE OF CONSTRUCTIVE NOTICE’ AND ‘DOCTRINE OF INDOOR MANAGEMENT’X X X X Extracts X X X X X X X X Extracts X X X X ..... DISTINCTION BETWEEN ‘DOCTRINE OF CONSTRUCTIVE NOTICE’ AND ‘DOCTRINE OF INDOOR MANAGEMENT’ - By: - Mr. M. GOVINDARAJAN - Corporate Laws / IBC / SEBI - Dated:- 9-5-2024 - A company is to be registered under the Companies Act, 2013 ( Act for short). The company is incorporated under the provisions of Act through SPICe+ form through which Memorandum of Association ( MoA for short) and Articles of Association ( AoA for short) are generated. A MoA represents the charter of the company. It is a legal document prepared during a company's formation and registration process. It defines the company's relationship with shareholders and specifies the objectives for which the company has been formed. It establishes the company s authority and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e terms under which it works. It is a manual that includes all of a company s laws and regulations for its interactions with the outside world. The organization cannot work outside the limits of the document until it has been prepared. If the corporation goes beyond its authority, the activity would be deemed supra vires and therefore null. The MoA is a public document. It is also called as the constitutional document of the company. Any one can inspect the said document in the office of Registrar of Companies by paying the prescribed fee within the prescribed time. all that is expected of an individual who wishes to enter into contracts with the corporation shall inspect the said document and know all the information of the Company. Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 399 of the Act states that any person may, after payment of the prescribed fees inspect by electronic means any documents kept with the Registrar of Companies. Any person can also obtain a copy of any document including the certificate of incorporation from the Registrar. In the Act, it is important to understand Memorandum and Articles of Association if one wants to thoroughly want to understand Incorporation of a Company. MoA is the basic document of a company whereas AoA set the rule and regulation of the company. Here, under Articles of Association there are two important Doctrines, Doctrine of Constructive Notice and Doctrine of Indoor management. Hence, these two doctrines work hand in hand to protect the interest of company and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person getting into a contract with the company. The doctrine keeps a check and makes sure that none of the parties have unfair gains from a said contract. Doctrine of Constructive Notice- Meaning The Act makes it necessary for the Memorandum and Article of Association are to be registered with the Registrar of the Company within their jurisdiction. And as soon as they are registered, they become Public Document . They are open and accessible to whole of the public in general. Due to this it s presumed that anyone dealing with the company has gone through these documents and has knowledge of the same and thus, it is the duty of the parties dealing with the company to through these documents before entering any contract. Doctrine of Indoor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Management- Meaning The principle of Indoor management states that a person contracting with a company cannot be held liable or be compelled to gain knowledge of the internal functioning of the company and proceedings of the company in relation of the said contract. The Doctrine of Indoor Management protects the third party dealing with the company from its illegal actions. This doctrine stipulates that the internal affairs of a company are to be managed by its directors and not by outsiders. Distinction Doctrine of Constructive Notice Doctrine of Indoor Management Origin : The House of Lords propounded the doctrine of constructive notice when it was decided for the first time that anyone engaging with the corporation is presumed to be awar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the information included in all of its public publications. Origin: This doctrine was developed in the case of Royal Bank v. Turquand. (1856) 6 E B 327. In this case, the deed of settlement, gave the Board of Directors the authority to borrow money in accordance with a resolution passed by the general meeting of shareholders. It was decided that an outsider did not need to check to see if such a resolution had been passed. Because the resolution's passage constituted an internal affair, the corporation was obligated to the bank. Everyone is aware of the contents of the Memorandum of Association, Articles of Association, and any other document such as special resolutions because they are filed with the Registrar and are available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for public inspection. Company is protected from outsiders. Case law: Kotla Venkataswamy v. Rammurthy. Protects third parties who enter into a contract with the company from any irregularities in the company's internal procedures. Third parties cannot discover internal irregularities in a firm, hence the company is liable for any losses incurred as a result of these irregularities. The memorandum and articles of association of the company are public documents. They need to be registered with the Registrar of Companies. These are open to public and third parties to access. It s confined to external position and affairs of the company. The internal affairs need not be registered They are not open to public and third parties. It s confined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to internal position and affairs of the company. The third persons, who have no notice of an irregularity or want of authority, if they try they could know about that irregularity or want of authority, will not be protected on the principle of constructive notice . Third persons, who have no notice to any irregularity or want of authority, will be protected as it is presumed that there is no internal irregularity and that the third party cannot inquire into the private matters of the company. It acts as a protective measure against outsiders, for the benefit of the company. It acts as an exception to the Doctrine of Constructive Notice and lessens its impact. Exceptions to doctrine of indoor management The following are the exceptions to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he doctrine that have been judicially established, which provide circumstances under which the benefit of indoor management cannot be claimed by a person dealing with the company- Knowledge of irregularity - This rule does not apply to circumstances where the person affected has actual or constructive notice of the irregularity. In Howard V Patent Ivory Manufacturing Company (1888) 38 Ch D 156, the Articles of the company empowered the directors to borrow up to 1,000 pounds. The limit could be raised provided consent was given in the General Meeting. Without the resolution being passed, the directors took 3,500 pounds from one of the directors who took debentures. Held, the company was liable only to the extent of 1,000 pounds. Since the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectors knew the resolution was not passed, they could not claim protection under Turquand s rule. Suspicion of irregularity - In case any person dealing with the company is suspicious about the circumstances revolving around a contract, then he shall enquire into it. If he fails to enquire, he cannot rely on this rule. In the case of ANAND BEHARI LAL VERSUS DINSHAW AND CO. - 1945 (10) TMI 22 - PRIVY COUNCIL , the plaintiff accepted a transfer of property from the accountant. The Court held that the plaintiff should have acquired a copy of the Power of Attorney to confirm the authority of the accountant. Thus, the transfer was considered void. Forgery - Transactions involving forgery are void ab initio (null and void) since it is not the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of absence of free consent; it is a situation of no consent at all. This has been established in the Ruben V Great Fingall Consolidated case [1906] 1 AC 439. A person was issued a share certificate with a common seal of the company. The signature of two directors and the secretary was required for a valid certificate. The secretary signed the certificate in his name and also forged the signatures of the two directors. The holder contented that he was not aware of the forgery, and he is not required to look into it. The Court held that the company is not liable for forgery done by its officers. - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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