Doctrine of indoor management and doctrine of constructive notice – conflicting

doctrines

Submitted by

Nandita Agarwal

Batch 2020-25, DIVISON C,BBA.L.L.B.,PRN-20010224188

Symbiosis Law School, Noida

Symbiosis International(Deemed University),Pune

As on 26th
August, 2022

Under the guidance of

Ms Pallavi Mishra

1
 CERTIFICATE

The following research paper is entitled at doctrine of indoor management and doctrine of
constructive notice- conflicting doctrines the submission of which is being made to
Symbiosis Law School, Noida for company law I as a part of the Internal Continuous
Evaluation-Research Project for Semester-V and the same is my original work which has
been performed under the guidance of Ms Pallavi Mishra. The data and material collected
and borrowed for the purpose of research in the project has been duly acknowledged.

2
 ACKNOWLEDGEMENT

I would like to thank the exceptional support of my teachers, their knowledge and guidance
which has prevented me from making errors in the research paper. I would also like to thank
them for painstaking on my doubts patiently and answering them and nourishing the paper
with their valuable and insightful comments.

I would also like to extend my gratitude towards the library team and the IT support team for
providing access to Open Athens and other electronic sources and databases for research
which helped me in my research project by giving me access to online databases and latest
case laws in this time of pandemic.

I would like to thank the authorities for assigning me this topic as it has envisaged my
knowledge on the topic and has been a learning forum for me and also helped me understand
the basic essentials required to constitute a partnership and have a clarity on the test to
partnership and how partnership extend to be a law of agency.

Finally, I would like to thank all those hands whose efforts in making this research project
instrumental might have gone unnoticed.

3
Serial Topic Page Number
number

1. Certificate Pg 2

2. Acknowledgement Pg 3

3. Introduction Pg 5

4. Aims of the Research Paper and Research Questions Pg 6

5. Theory Pg 8;
Pg 9;
Pg10

6. Conclusion. Pg 11

7. Bibliography. Pg 12

4
 INTRODUCTION.

In the company both article of association as well as memorandum of association are

important to understand so as to get an understanding of the corporation of a company. This
is laid down under sections 2(5) and 2(56) of the companies act 2013

The two important doctrines are present under articles of association

 Doctrine of indoor management

 Doctrine of constructive notice

Two significant doctrines are found under the Articles of Association: the doctrine of
constructive notice and the doctrine of indoor management. The former shields the
corporation from the arbitrary activities of third parties, whereas the latter shields third parties
from the arbitrary actions of the company. Therefore, these two concepts complement one
another to safeguard both the interests of the business and the party entering into a contract
with it. The doctrine maintains control and ensures that no party derives improper benefits
from a given contract. For understanding, it is essential to examine these two doctrines
together

The doctrine of indoor management is also said to be known as Turquand rule. Anyone
who enters into a contract with the firm must make sure that the transaction is permitted by
the company's articles and bylaws. No investigation into internal irregularities is necessary,
and even if there are any, the corporation will still be held accountable because the person
acted in good faith.

The Memorandum articles and any other documents that are publicly filed with the registrar
are covered by the constructive notice doctrine. This notice stops third parties from suing
the corporation on the basis that they are unaware of its present positions and authority.

5
 AIM OF THE RESEARCH PAPER

The aim of the research project is to establish an understanding of the doctrines of

constructive notice and indoor management with respect to the companies act, 2013 and to
get a clear overview as to how these doctrines are conflicting in nature

6
 RESEARCH QUESTIONS

1. Is the doctrine of indoor management an exception to the doctrine of constructive

notice? Lay down a comparative analysis between the two

2. Explain the relationship between both the doctrine of indoor mangement and the
doctrine of constructive notice

7
 THEORY

Explanation to research question (1)

Yes the doctrine of indoor management acts an exception to the doctrine of constructive
notice. The Doctrine of Indoor Management attempts to protect the outsider from the firm,
whereas the Doctrine of Constructive Notice seeks to protect the company from the outsider.

This doctrine highlights the idea that an outsider who acts in good faith and enters into a
transaction with a firm can have a presumption that there are no internal irregularities and
that the company has complied with all procedural requirements.

The Doctrine of Indoor Management provides this level of safety. Although it is essential for
the outsider to be familiar with the company's memorandum and articles of association in
order to seek redress for the situation, this doctrine also applies to the government authority.

DOCTRINE OF CONSTRUCTIVE NOTICE DOCTRINE OF INDOOR MANAGEMENT

It provides protection to the company against the It provides protection to the people who are
outsiders outside the company

It is confined to external affairs and position of It is confined to internal affairs and position of
the company the company

The articles of association and the memorandum Under this, the registration is not mandatory. It is
of the company both are public documents. not open to the third parties or the public
These are accessible to the third parties as well as
the general public

8
 It serves as a deterrent to outsiders The effect of doctrine of constructive notice is
mitigated by the doctrine of indoor management

Explanation to the research question (2)

The company’s articles of association are its rules and regulations which governs the conduct
of the business as well as the internal affairs. As under section 610 of the companies act both,
articles of association and memorandum of association, constitutes public documents. As a
result, it is claimed that both company members and non-members are aware of the contents
of the memorandum and articles.

The principle of constructive notice applies to all documents that must be registered with the
Registrar of Companies, and not just Memorandum and Articles. However, there is no
constructive notice for documents submitted to the Registrar of Companies purely for record-
keeping purposes

The doctrine of Indoor Management limits the use of constructive notice to the company's
public papers. The philosophy of indoor management plays a different role than the
constructive notice rule. A person doing business with the corporation is therefore required to
study just the public documents. The corporation is obligated if his contract complies with
them. Any irregularity in the organisation’s internal management will not have an impact on
him.

The case of Royal British Bank v. Turquand1 established the basis of the rule. A provision
in the constitution of the firm Turquand permitted borrowing once a resolution (decision) was
accepted and adopted by the shareholders at a general meeting. Two of the co-directors of
Turquand signed the loan agreement and affixed the business seal before Turquand engaged
into a loan with the Royal British Bank. The stockholders had not given their consent for the
loan. Bank requested compensation when the company missed payments. Company refused
to pay back, alleging the directors lacked authority to engage into such a contract.

It can thereby be said that the doctrine of indoor management and doctrine of constructive
notice go hand in hand. When an outside is not able to enquire about the company, the
doctrine of constructive notice comes into the picture however when an outsider can invoke
the doctrine of indoor management and not the company

CONCLUSION

1
(1856) 6 E&B 327

9
Now, when we examine the two theories and contrast how they are applied, it is obvious that
the Doctrine of Constructive Notice has created a lot of problems for businesses and is
harmful to the interests of the third party, placing a huge burden on them and raising investor
concern. It can thereby be concluded that the doctrine has a restrictive nature.

It is due to this reason that the courts in India are reluctant when it comes to its application
and has as well scrutinised it so as to ensure that the doctrine is not applied in infraction of
the basic postulates of justice and the rule of law. The high court in the case of Dehradun
Mussoorie Electric Tramway Co. v. Jagmandar Das2 held the company to be liable and
rejected the doctrine of constructive liability

This theory has not received much attention from Indian courts. By introducing Section 9 of
the Act, which acknowledges the concept of good faith in business transactions, the European
Communities Act also eliminated the idea of constructive notice. This clause is in line with
the reality of commercial transactions, where third parties engage into contracts with the firm
not based on its records but rather on the good faith of the company.

Therefore, in order to counteract its effects, safeguard third parties from the company's
arbitrary actions, and prevent the latter from evading their liability, the doctrine of indoor
management was developed as an exception to the doctrine of constructive notice.

BIBLIOGRAPHY.

2
AIR 1932 All 141

10
  A.H.D, Doctrine of indoor management, Yale Law Review, Vol. 27, No.9 , 588-591
(1924)

 Pollock & Mulla Devashish Bharuka , The Indian Partnership Act, Chapter 2, Section
6 and 18 (Lexis Nexis, 2019) .

 Mark Lewis, Problems and cases in the companies act, 65 U. Harvard Journal of Law
Reform 345 (2009)

 Subject index and Table of Cases (English) 18th Edition , LexisNexis, 2014

 Heans C G, Bearle A, The Modern Corporation and Private property Pennington,

Company Law

11