1. ConstructiveNotice&
IndoorManagement
Dharmendra S Chawla SYLLBRollNo.08

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• MOA & AOA are two main documents required for
incorporation of a company
• MOA and AOA are to be registered with ROC
• Registrar of company is a public office
• Consequently, MOA & AOA of company registered
with ROC becomes public document
• They are open and accessible to everyone
• Doctrine of Constructive Notice is a protection
granted to company against outsiders dealing with
the company
ConstructiveNotice
It is the duty of every person dealing with a
company to inspect these documents before
making any dealing with the company
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KotlaVenkataswamyv.Rammurthy
(AIR1934Mad579)
• Does the plaintiff have any remedy for enforcing her mortgage deed?
• Whether the mortgage deed was duly executed and would the company be liable to the plaintiff?
Facts –
• The plaintiff held a mortgage bond executed by company and it was
signed by the Working Director and Secretary of the company. The
plaintiff asserted that debt and interest were regularly paid by the
company to the plaintiff.
• The company went into voluntary liquidation and the mortgaged
property was sold.
• The plaintiff filed a suit in the lower court to enforce the right in the
property, but the contention of the plaintiff was rejected by the
court, and her subsequent appeal was filed before the Madras High
Court.
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• The plaintiff contended that since the Managing Director was under prosecution for criminal charges,
his signatures could not be obtained. The court rejected the contention of the plaintiff and stated that
the mere fact that Managing Director was not available would not make the execution by Secretary and
Working Director valid.
• The court further added that based on the facts of the case it is clear that the plaintiff had not read the
MOA and AOA and thus he had no constructive notice that the documents required the signatures of
Director, Secretary and Managing Director, which indicates the document was not duly executed and
hence the plaintiff has no remedy.
• The court, while rejecting the contention of the plaintiff, stated that had the plaintiff read the MOA and
AOA, she would have known that the mortgage bond required signatures of Managing Director,
Secretary and Working Director.
Judgement
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• The doctrine of indoor management is also known
as “TURQUAND’S RULE”
• The doctrine of indoor management protects
outsiders, who have entered into any contract with
the Company
• If a company is said to enter into a contract, the
obligations of following companies policies fall on
the member of the Company and not on any party,
who enters a contract with the company.
• The doctrine of indoor management is opposite to
the doctrine of Constructive notice
IndoorManagement
The doctrine presumes that every person has
knowledge of the contents of the MOM, AOA and
every other document such as special resolutions as it
is filed with the ROC and available for public view.
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RoyalBritishBankv.Turquand
6E&B327,AllER4355
Facts –
• The directors of Royal British Bank Ltd. issued a bond to Turquand
and borrowed money from him. The Articles of Association
authorized the directors to issue such bonds with the approval of
a proper resolution.
• The directors were empowered by the Articles to borrow on
bonds only such sums of money as the company in a general
meeting resolves to borrow from time to time (through the
passing of necessary resolution).
• However, no such resolution was passed for authorizing the issue
of bonds. And the directors issued a bond to Turquand without
the authority of a necessary resolution.
• Later, the repayment of the loan defaulted and the company was
questioned to be liable. The claim was refused by the shareholders
in the absence of the resolution
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Whether the company is liable for the loan?

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• Regardless of the fact that the bonds were issued without being authorized under a resolution, it was
determined that Turquand could sue on the bonds since he was entitled to presume that the resolution
had been legally passed
• It was pointed out that an ordinary person dealing with a company is entitled to assume that the
necessary compliance or delegation of powers to the officer(s) dealing on behalf of the company has
been made. He does not need to inquire beyond what is apparent and obvious from the situation
In this view, Lord Hatherley cited the principle of indoor management.
• He observed that “Outsiders are bound to know the external position of the company, but are not
bound to know its indoor management”
• It was not the duty of Turquand to enquire whether the resolution had been actually passed or not
• Hence, he could sue the company on the bond and the bond was binding on the company
Judgement
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• Knowledge of Irregularity
T.R. Pratt(Bombay) Ltd. v. E.D. Sassoon & Co. Ltd.
• Suspicion of Irregularity
Anand Bihari Lal v. Dinshaw & Co.
• Forgery
Ruben v. Great Fingall Ltd
• Acts falling outside apparent authority
Kreditbank Cassel v. Schenkers Ltd. ExceptionsofIndoorManagement
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Knowledge of Irregularity
When an outsider who is entering into a transaction with a
company has constructive or actual notice of the irregularity in relation
to the internal management of the company, then He/she cannot seek
remedy under the doctrine of Indoor Management
T.R. Pratt(Bombay) Ltd. v. E.D. Sassoon & Co. Ltd
Facts –
• Company A had lent money to Company B for mortgaging its assets.
The procedure for the same which was laid down in the Articles for
such nature of transactions were not complied with. The Directors of
both the companies were the same.
Court Held –
• It was held by the Court that the lender was aware of such an
irregularity and hence the transaction was not binding
Where an outsider entering into a transaction with a
company could discover the irregularities in the management of the
company if he/she would have made proper inquiries, then he/she
cannot seek remedy under the doctrine of Indoor Management
Anand Bihari Lal v. Dinshaw & Co.
Facts -
• The Plaintiff had accepted a transfer of a company’s property from
the accountant of the company.
Court Held –
• That the transfer is void in nature as such a transaction was beyond
the scope of the accountant’s authority. It was the duty of the
plaintiff to check the power of attorney that was executed in favour
of the accountant by the company.
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Suspicion of Irregularity
ExceptionsofIndoorManagement

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Forgery
It is pertinent to note that the Doctrine of Indoor Management
does not apply in cases where an outsider relies on a document which is
forged in the name of the company. A company can never be held liable for
the forgeries committed by its officers.
Ruben v. Great Fingall Ltd
Facts –
• The Plaintiff was a transferee of the share certificate issued under the
seal of the defendant company.
• The certificate was issued by the Company’s secretary who has forged
the signature of the two directors of the company and had affixed the
seal of the Company.
Court Held –
• It was held by the court that the doctrine of Indoor Management has
never extended to cover a forgery.
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ExceptionsofIndoorManagement
Acts falling outside apparent authority
Acts done by an officer of a company which are beyond the scope of
its apparent authority will not make the company liable for any of the
defaults caused by the officer.
Kreditbank Cassel v. Schenkers Ltd.
Facts –
• The branch manager of the company had endorsed a few bills of
exchange in the name of the company in favour of a payee to whom he
was personally indebted. The Company did not give him any authority to
do so.
Court Held –
• It was held by the court that the company was not bound. Additionally, it
was also stated that if the officer of the company commits fraud under
his apparent authority on behalf of the company, then the company will
be held liable for the act of fraud committed by the officer.

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ImportantDifferences
The Doctrine of Constructive Notice
• It protects the company against the outsider.
• It is confined to the external position and affairs of the company.
• The memorandum and articles of association of the company are
public documents. They must be registered with the Registrar of
Companies. These are open to public and third parties to access.
• Third persons, who have no notice of an irregularity or want of
authority, if they try they could know about that irregularity or want
of authority, will not be protected on the principle of ‘constructive
notice’
• It operates as an estoppel against the outsider.
• It is based on negative concept.
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The Doctrine of Indoor Management
• It protects outsider against the company.
• It is confined to the internal position and affairs of the company.
• The internal affairs need not be registered, They are not open to
public and third parties.
• Third persons, who have no notice to any irregularity or want of
authority, will be protected on the principle called the ‘Turquand
Rule’.
• It mitigates the effects of the “Doctrine of Constrictive Notice”.
• It is based on positive concept.

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ThankYou
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