Doctrine of Constructive Notice and Indoor Management

Doctrine of Constructive Notice

The Memorandum and Articles, on registration, assume the character of public documents. The office of the Registrar is a public office and documents registered there are open and accessible to the public at large. Therefore, every outsider dealing with the company is deemed to have notice of the contents of the Memorandum and Articles. This is known as Constructive Notice of Memorandum and Articles.

Under the doctrine of ‘constructive notice’, every person dealing or proposing to enter into a contract with the company is deemed to have constructive notice of the contents of its Memorandum and Articles. Whether he actually reads them or not, it is presumed that he has read these documents and has ascertained the exact powers of the company to enter into contract, the extent to which these powers have been delegated to the directors and the limitations to such powers. He is presumed not only to have read them, but to have understood them properly. Consequently, if a person enters into a contract which is ultra vires the Memorandum, or beyond the authority of the directors conferred by the Articles, then the contract becomes invalid and he cannot enforce it, not-withstanding the fact that he acted in good faith and money was applied for the purposes of the company.

Doctrine of Indoor Management

The doctrine of indoor management follows from the doctrine of ‘constructive notice’ laid down in various judicial decisions. The hardships caused to outsiders dealing with a company by the rule of ‘constructive notice’ have been sought to be softened under the principle of ‘indoor management’. It affords some protection to the outsiders against the company.

According to this doctrine, after satisfying themselves that the proposed transaction is intra vires the memorandum and articles, persons dealing with the company are not bound to enquire whether the internal proceedings were correctly followed. They are entitled to assume that the internal proceedings relating to the contract are regular as per the memorandum and articles. When an outsider enters into a contract with the company, he is presumed to have knowledge of the provisions of memorandum and articles as per the doctrine of constructive notice. But he is not required to go beyond that and to enquire whether the internal proceedings required by these documents have been regularly followed by the company. They need not enquire whether the necessary meeting was convened and held properly or whether necessary resolution was passed properly. They are entitled to take it for granted that the company had gone through all these  proceedings in a regular manner. This is known as the Doctrine of Indoor Management.

The doctrine of indoor management was first propounded by Lord Hatherlyin the celebrated case Royal British Bank vs. Turquand. The directors of the Bank had issued a bond to Turquand. The company was empowered by its Articles to issue such bonds provided it was authorized by a resolution of the company in general meeting. In this case no such resolution had been passed. It was held that Turquand could recover the amount of bond from the company on the ground that he was entitled to assume that the necessary resolution had been passed by the company.

Exceptions to the Doctrine of Indoor Management

No benefit under the doctrine of indoor management can be claimed by a person under the following circumstances:

  • Where a person dealing with the company has actual or constructive notice of any irregularity in the internal proceedings of the company.
  • Where a person did not in fact consult the Memorandum and Articles of the company and consequently did not act on knowledge of these documents.
  • Where a person dealing with the company was negligent and, had he not been negligent, could have discovered the irregularity by proper enquiries.
  • Where a person dealing with the company relies upon a forged document or the act done by the company is void.
  • Where a person enters into a contract with an agent or officer of the company and the act of the agent/officer is beyond the authority granted to him.