A company has separate legal entity which can be formed by an association of individuals to with the intention to carry commercial activities to generate profit. The formation and functioning of the company are governed by certain laws, rule and regulations. The intention to behind the enactment of such laws is to provide protection to company, its management as well as the outsider person who is contractually engaging with the company. There are certain set of laws and the principles which provide safeguard to the company from the outsider person and vice versa. Companies use to resources in the country and generate revenues. So, companies constitute important role in the growth of the economy and hence, it becomes necessary to create the laws governing them. These laws operate as prevention to curb the unfair and wrong practices in the corporate world. The doctrine of constructive notice and the doctrine of indoor management are important principles in the Company Laws. The former being the rule and the latter being the exception to it.

The doctrine and its exception provide the protection. The doctrine of constructive notice protects the company from the actions of outsider person and the doctrine of indoor management protects the outsider person from the actions of the company. The interest of the company and the outsider person has been protected. Both the doctrines make sure that no party gets unfair gain out of any contractual operation.

Doctrine of Constructive Notice:

This doctrine reduces the complicity in the rules and regulations of the business. This Doctrine functions as a safety to the company while dealing with the outsider party. There is no strict definition to constitute the Doctrine of Constructive Notice, but it can be summed as follows. A company is public body and the documents such as Memorandum of Association and the Article of Association of the company are open to public for inspection. Therefore, it is assumed that the outsider person, who is involving with the company for business, has gone through these documents. It is a duty of outsider person to be aware of the rules and regulations of the company because they it is available in public record. This assumption is called the Doctrine of Constructive Notice.

At the time of the formation of the company MOA and the AOA of the company are submitted with the Registrar of Companies. These documents are the charter of the company and the company is governed by laws mentioned there. This doctrine puts the obligation on the outsider person to inspect and well verse with these two documents. In the event of a dispute, the outsider person cannot take the defence that he doesn’t have the knowledge of the rules given in the MOA or AOA. This rule is vital while the adjudicating the disputes arising out of the violations of MOA and AOA. So, the doctrine of constructive notice can be termed as the bylaws of the company must to be known to the outsider person as that information is available in the public domain. It is not the company’s duty to convey this information to the outsider person as that information is available in the public domain.

 Section 399 of the Companies Act, 2013 gives the legal foundation for this doctrine. As per this section, the Companies Act allows the outsider person to inspect and go through the records of the Company which are available with registrar of the Company. This section also provides the right of inspection of the documents of the company. The MOA and AOA of the company are the public document and the outsider person shall get into the contract only after the inspection of these documents. By this provision, the doctrine of constructive notice is established by which the person is presumed to have the knowledge of the information in the documents available publically. Before getting into the contract with any company, the outsider person must have knowledge of the company and he shall ensure that his purpose shall be fulfilled. Making available the documents of the public is the assumed and implied notice to the outsider person.

This doctrine is applicable to the documents which are available in the public record at the Registrar of Company. In the case of Oakbank Oil Co. vs. Crum  it was held that, anyone who is involving in the contract with the company shall be assumed to have the knowledge and the understanding of the company’s MOA and AOA. Therefore, the person is presumed to have the notice of it. This principle is called doctrine of the constructive notice.

Doctrine of Indoor management:

The nature of the Doctrine of Indoor Management is wholly opposite to that of the doctrine of the constructive notice. The former protects the outsider person from the illegal actions of the company and the latter works as a protection to the company from the illegal actions of the outsider person. The principle of the constructive extends to operation that there shall no need to deliver actual notice. Doctrine of Indoor Management sets the principle that the persons involving into contract with the company cannot be compelled to obtain the knowledge of the internal functioning and the proceeding of the company in relation with the contract. The doctrine of Indoor Management is exception to the rule established by the Doctrine of constructive notice.  This doctrine of indoor management is derived on the concept that the person getting into the contract with the company operates in good faith and he shall not suffer by the illegal actions of the company.

The Doctrine of Indoor Managements states that outsider person has no responsibility to have the knowledge about the internal affairs of the company. The outsider person cannot be bound by the duty to review the internal functioning or the internal managerial proceedings of the company. So, the outsider person shall not be made liable for the irregularities in the internal proceedings of the company. The company cannot transfer its liability on the outsider person of its own irregular internal actions. This principle is called the Doctrine of the Indoor Management.

It is not the responsibility of the outsider person to look into internal management and the compliances of the company except MOA and AOA. If any such irregularity occurs due to the actions of the company then the company itself is responsible as the outsider person has acted in good faith. As it is assumed that the outsider person has the knowledge of the MOA and AOA, it shall also be assumed that, the internal compliance has been done by the company.

It is the responsibility of the company to comply all the requirements provided in the in the MOA and AOA, the outsider person cannot be bound with the responsibility of to inspect the internal matters of the company.  Though, it is obligatory for the outsider person to check whether the contract is in consistency with the MOA and AOA. If the object of the contract is in accordance with and authorised by the MOA or AOA of the company, then the outsider person can presume that all the internal regulations are being completed by the Company. The obligation of the outsider person ends there and the company becomes responsible for any ultra vires act or any irregularity remained in the contract. The doctrine of Indoor Management simply states that the indoor affairs of the company are the company’s difficulty to tackle and company has to bear its consequences. This doctrine is essential for directors who act on behalf of the companies. Persons contracting with the company can presume that the acts done by these directors are within their powers and scope. So, any act done by them in accordance with the MOA or AOA then the outsider person can assume validity of that act as it is done in their capacity.

Both the doctrines have been established maintain the balance between both the parties to the contract. No party in the contract shall take unfair advantage of its irregular and illegal actions and it is made sure that the other party shall not suffer by its consequences.

Author Bio

Qualification: LL.B / Advocate
Company: N/A
Location: Pune, Maharashtra, IN
Member Since: 09 Aug 2020 | Total Posts: 1

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