DOCTRINE OF CONSTRUCTIVE NOTICE AND IT'S EXCEPTION: DOCTRINE OF INDOOR MANAGEMENT

Constructive means Presumption and Notice means to give information about something. Whenever a company is registered, all the documents are uploaded and registered. It is a very transparent thing as we can read all the MOAs and AOAs of various companies. These documents are public documents.

The doctrine of Constructive Notice imposes a duty on the buyer. The buyer needs to do due diligence before purchasing any shares or investing. The buyer needs to check the documents and scrutinize them before registering. A check on the tile is required before one enters into a contract or any sort of investment. It is also said that this doctrine is harsh because sometimes we cannot find out whether the title was correct or not.

Section 399 of the Act[i], provides that MOA and AOA when registered with the ROC become public documents. Any person who wishes to enter into a contract with the company has the means of ascertaining the powers of the company and the extent of the powers delegated to the Board of Directors. Every person dealing with the company is treated to have actual or constructive knowledge of the contents of these documents. When a person enters into a contract that is not permitted in the MOA and AOA, the contract is void and the company will not be liable for the same.

Discussion through case law-

Kotlas Venkatswany vs. Ram Murthy and Ors.[ii]

 In this case, the Articles required that all the documents should be signed by the MD, CS, and the Working Director on behalf of the company. A mortgage deed was executed in the favour of the mortgagee that it was only signed by the CS and the Working Director. The Mortgagee filed a case on the company for foreclosure of the property which was mortgaged against the loan.

The Court held that no claim would stay under such contract because the mortgagee must have examined the Articles before lending the money as every person dealing with the company is presumed to have read and understood the MOA and AOA in their true perspective. Therefore, applying the rule of constructive notice the company must be protected against the outsider.

DOCTRINE OF INDOOR MANAGEMENT

This is an exception to the concept of Constructive Notice. The Rule of Constructive Notice proved to be inconvenient for business transactions particularly where the Directors or other officers of the company were empowered under the Article to exercise certain powers subject to prior approval or sanctions of the shareholders. Whether these approvals had been obtained could not be ascertained because the investors, creditors, and other outsiders do not form part of internal resolution. Therefore, the Doctrine of Indoor Management protects outsiders against the company. This is also known as the Turquand Rule.

Discussion through case law

Royal British Bank vs. Turquand[iii]

The Rule of Indoor Management was first laid down in this case. The Directors of the company were authorized by the Articles to borrow funds by issuing bonds and the amount of money was to be decided in the General Meeting by a resolution. The Directors issued bonds and borrowed funds from the Royal British Bank without passing any resolution. In an action by the Bank against the company on non-payment of the money, the company argued that there has been no resolution passed authorizing the Directors to borrow such amount of money and therefore the company shall not be held liable for repayment of the amount. The Court held that outsiders dealing with the company are required to read the Memorandum and Articles of the company but they need not enquire into the regularities of internal proceedings. The Bank had the right to infer that necessary resolutions must have been passed as it was part of the internal functioning of the company. Therefore, the company is not protected in such cases and shall be held liable for repayment of the loan along with interest.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.