Jan 8, 2018
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What is doctrine of Constructive Notice and Doctrine of Indoor management?

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What is doctrine of Constructive Notice and Doctrine of Indoor management?

Meaning of Company:

Section 2 (20) of Companies Act, 2013” “Company” means a company incorporated under companies Act. The company has different and distinct personality from its members. It also has no strictly technical or legal meaning. A body corporate or corporation includes a company incorporated outside India, but does not include a co-operative society registered under the law relating to co-operative societies, and any body corporate which the Central Government may, by notification, specify for this purpose. “Company” word derived from two words: “com”- group and “panies”- bread. Therefore, it means group that eat their bread together.

 Doctrine of Constructive Notice

Doctrine of Constructive notice protect the company from the outsiders. Its introduced to protect the the company from the outsider of company. The memorandum of association and articles of association of every company needs to register with Registrar of companies. After registering the documents with registrar of company, it becomes public documents. Its because the office of registrar is a public office.

They are open and accessible to all.  So, its necessary for every person dealing with a company to inspect and understand the memorandum and Articles of Association. Even if person does not read the public documents of company, its assumed he has read the public documents of the company. Its presumed by the company that he knows the contents of those documents.

Further it adds that the person dealing with the company, not only presumed to know the contents of public documents of the company but also understand them according to their real meaning and intention. For instance, he should not only known the powers of company but also the powers of the officer behind the company.  According to Palmer, the principle applies only to the documents which affect the powers of the company.

The common law doctrine of constructive notice applies to all public documents of the company. It contains all the important details of directors, managers , secretaries etc of the company. It also contains Audited accounts of the company. The doctrine protects the company from outsiders.

There is no relief if person claims that he has not read the memorandum and article of association before dealing withe the company. Under this doctrine, company plays safe. It effects the outsiders who deal with company and faces some problem after dealing with the company.

Doctrine of Indoor Management-

The doctrine of indoor management evolved 150 years ago. Its also known as Turquand’s rule. The role of the doctrine of indoor management opposed to that of the rule of constructive notice. The Doctrine of Constructive Notice protects company from the outsider. Whereas, the Doctrine of Indoor management protects outsider from company.

The outsider has no clue how the internal part of company works. He presumes that there is no irregularities the internal machinery of company. This doctrine also a possible safeguard against the possibility of abusing the doctrine of constructive notice.

A person contracting with the company only needs to inspect the memorandum and article of association of company. He not required to conduct inspection on internal irregularities. If there are any internal irregularities then its company’s liability to compensate him for any loss. But person needs to act in good faith and did not know about the internal irregularities of the company. This doctrine protects the outsider from company as he is unaware of the activities which happens behind the closed door of the company.

ORIGIN OF THE DOCTRINE

This doctrine was laid down in the case of Royal British Bank V. Turquand

The directors of the company borrowed some money from the plaintiff. The article of company provides for the borrowing of money on bonds but there was a necessary condition that a resolution should  passed in general meeting. Now in this case shareholders claims that as there was no such resolution passed in general meeting so company is not bound to pay the money.  It was held that the company is bound to pay back the loan. As directors could borrow but subjected to the resolution, so the plaintiff had the right to infer that the necessary resolution must have been passed.

It was held that Turquand can sue the company on the strength of the bond. As he was entitles to assume that the necessary resolution had been passed. Lord Hatherly observed- “Outsiders are bound to know the external position of the company, but are not bound to know its indoor management.”  

Exceptions to Doctrine of Indoor Management

Following are the exception to doctrine of Indoor Management:

1. Knowledge of irregularity

The first exception to this doctrine is that the person dealing with company should not have any knowledge about the internal irregularities of the company. Knowledge of irregularity arises from the fact that the person contracting was himself a party to the inside procedure. The principle is clear that a person who is himself a part of the internal machinery cannot take advantage of irregularities.

2. Forgery

Doctrine of indoor management does not apply to forgery because forgery is void ab- initio. Lord Loreburn said: “Its quite true that persons dealing with limited liability companies not bound to inquire into their indoor management. But not affected by irregularities of the company if they have no knowledge about such irregularities. It cannot apply to a forgery.

3. Negligence on the part of the outsider

If loss suffered due to negligence of outsider, relief can not claimed under doctrine of Indoor Management. If the person dealing with the company already had a hint about the internal irregularities of the company and still by neglecting the irregularities, he enters into contract with the company, then he cannot claim under doctrine of Indoor Management.

 

Article Categories:
The Companies Act, 2013

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