INTRODUCTION
The Company is a separate legal entity that is incorporated to carry out business. The major legal documents of the company are the Memorandum of Association (MoA) and Articles of Association (AoA). These are public documents. MoA is a basic document for any type of company whereas AoA sets rules and regulations for the company. It is important to comprehend these articles of a company as to understand its incorporation. Therefore under the legal documents, the Doctrine of Constructive Notice and the Doctrine of Indoor Management are two decisive doctrines that run simultaneously to each other.
DOCTRINE OF CONSTRUCTIVE NOTICE
The doctrine of constructive notice states that the person dealing with or handling the company is presumed to have constructive notice of the contents of the company’s documents though actual notice is not present.
The provision enabling this feature is Section 399 of The Companies Act 2013, which allows every person to inspect the Company document filed with the Company’s registrar by paying the prescribed fee. Therefore, any person who intends to enter a contract with the
company is presumed to know and therefore has the means of ascertaining the powers of the company.
In the case of Oakbank Oil Co. v. Crum 1881, it was held that every person dealing with the company completely understood the meaning of the documents in its true perspective. Further, in the case of Kotla Venkatswami v. Ramamurthy AIR 1934 Mad 579, it was contended that the bond could not be enforced against the company as it had not complied with the Articles of Association.
Hence, the doctrine of constructive notice renders the relevance of legal documents and presumes that the document has been read and acknowledged by the parties in the contract.
DOCTRINE OF INDOOR MANAGEMENT
The Doctrine of indoor management commonly known as the ‘Turquand’s Rule’ originated 150 years ago in relation to the ‘Constructive Notice Doctrine.’ It is considered as a rule to defeat the Doctrine of Constructive Notice. While the latter protects the company against third parties, the former helps protect the third parties from the company. It emerged as a response to the Doctrine of Constructive Notice due to the posed inconvenience about business transactions in relation to the powers of the officers. It protects the rights of the third parties acting in good faith by relying upon the company’s documents.
The Doctrine of Indoor Management sets out from the case of Royal British Bank v. Turquand (1856) 6 E&B 327. The facts of the case are that the Articles of the company give permission to raise money on bonds, which demands a resolution at the General Meeting. The directors did obtain the loan but passed no resolution in the General Meeting. The interest on loan is in arrears, and the company has been made liable for the default. The claim was refused by the shareholders, as no resolution in the General Meeting was produced before them. Held, the company shall be liable since the person dealing with the company is entitled to assume that there has been necessary compliance concerning the internal management.
The doctrine of Indoor management makes all dealers with the company consider that the provisions of the articles have been followed by the officers of the company. As alternatively stated , the parties dealing with the company need not make inquiries into the regularity of internal proceedings.
EXCEPTION TO DOCTRINE OF INDOOR MANAGEMENT
- Knowledge of Irregularity
Any person entering into a transaction with a company cannot avail himself of protection under this doctrine if he either has constructive or actual notice of irregularities about the internal management of the company.
In the case of Devi Ditta Mal v. The Standard Bank of India 1927, the transfer was sanctioned by two directors, one of whom within the knowledge of the transferor was also disqualified on the grounds of his being a trustee himself and the other never validly appointed. Transfer, therefore was declared invalid and inoperative altogether.
This exemption to the doctrine is bestowed upon persons transacting with a corporation but extends as well to another corporation. Thus, even a company may possess notice or knowledge or irregularity in the internal management of another company with which it deals and may forfeit its right on this ground of exception.
- Suspicion of Irregularity
In case any person dealing with the company suspects the circumstances surrounding an agreement, he will make an inquiry regarding it. If so, he cannot rely on this rule for failure to make an inquiry.
In the case of Anand Biharilal v. Dinshaw & Co. AIR 1942, wherein the claimant accepted an assignment of the company’s property from its accountant, and the transfer void, the plaintiff could not possibly succeed because he ought to have known that ordinarily an accountant cannot transfer the property of the company unless he has a power of attorney. Such circumstance would therefore raise suspicion of irregularity in the mind of the plaintiff that the accountant himself has transferred the property, thus inquiring whether the accountant was empowered either to make the transfer or not.
- Ignorance about the contents of Articles
No case of a party who has been in a business deal with the company is excluded under the Indoor Management rule. He has not read the articles. Even if he had examined those documents carefully, he still would not have found the problem.
- Fraud and Forgery
The Acts done under the name and style of a company which, being based upon forgery or fraud declared as null and void ab initio.
In the case of Ruben v. Great Fingall Ltd, the secretary of a company, without authority, and to raise a loan, forged the signatures of two directors required under the articles on a share certificate and issued it. the plaintiff, being the transferee of the share certificate, claimed that whether the signatures were forged or genuine was something pertaining to the internal management of the company and hence the company should be estopped from denying the genuineness of the certificate. However, the organization was not liable for the fraudulent acts carried out by its agents.
CONCLUSION
The Doctrine of Indoor Management plays an important role in company law. It serves as an exception to the doctrine of Constructive Notice. The doctrine of constructive notice has been in the limelight as a response to the inconvenience of the doctrine of constructive notice. Thus the doctrine of indoor management is a well-established rule that promotes efficiency, trust and protection of third parties.
REFERENCES
1. Companies Act 2013, s 300
2. Doctrine of Indoor Management, cleartax, https://cleartax.in/s/doctrine-indoor-management .
3. Rachit Garg, Doctrine of Indoor Management, iPleaders (Oct. 16, 2024), https://blog.ipleaders.in/doctrine-of-indoor-management/ .
4. Articles Manupatra, https://articles.manupatra.com/article-details/Analysis-of-Doctrine-of-Indoor-Management.
5. Royal British Bank v. Turquand, (1856) 6 E&B 327.
6. OAKBANK OIL COMPANY APPELLANTS; CRUM RESPONDENT., [L.R.] 8 App. Cas. 65
7. Kotla Venkatswami v. Ramamurthy AIR 1934 Mad 579
8. Devi Ditta Mal v. Standard Bank of India, 1927 SCC OnLine Lah 227
9. Anand Biharilal v. Dinshaw & Co. AIR 1942
10. Ruhen v. Great Fingall Consolidated [1906] A.C. 439, H.L
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